By Gayatri Suroyo and Ed Davies
JAKARTA (Reuters) – Indonesia’s central bank intends to review its normalisation plan for monetary policy in May to June, and wants to assess any risks to the inflation outlook if the government changes energy prices and subsidies, Governor Perry Warjiyo told Reuters.
Central banks in some more advanced economies have started to tighten monetary policy to fight soaring inflation as the war in Ukraine pushes energy and food prices up and exacerbates global supply chain problems.
Bank Indonesia (BI) has pledged to keep interest rates at record lows until it sees signs of pressure on core inflation and has previously said interest rate levels would only be reviewed in the third quarter.
In an interview on Monday, Warjiyo said that when fiscal policymakers meet with parliament’s budget committee to review the 2022 budget between May to June, BI would monitor whether the government chose to raise prices of gasoline, LPG and electricity tariffs to control subsidies.
After that, BI could better calculate the impact of such fiscal policy on inflation and it could decide “whether I’m still playing with my game plan or there’s (a) need to move earlier”, Warjiyo said, referring to a potential for earlier than expected policy normalisation.
If the government decided to keep energy prices unchanged and increase its subsidy budget, BI may hike interest rates in the fourth quarter to anticipate 2023 price pressures, Warjiyo said. If energy prices are raised, BI would likely move more quickly, he said.
“On the sequencing we will start with RRR (reserve requirement ratio) and then we will consider the interest rate,” he said, adding that it would also consider combining RRR hikes with sales of some of its government bond holdings depending on the movement of bond yields.
During the pandemic, BI cut interest rates by a total of 150 basis (bps) points and injected billions of dollars into the financial system, including by embarking on debt monetisation measures.
It already has plans for a total of 300 bps RRR hikes between March to September.
Indonesia’s headline inflation rate was 2.64% in March, while core inflation rate was 2.37%, both within BI’s 2% to 4% target range.
RUPIAH EXPECTED TO BE STABLE
Meanwhile, the governor expects the rupiah, historically one of Asia’s most risk-sensitive currencies, to remain stable throughout the year, buoyed by record high exports.
The outlook already took into account U.S. monetary tightening, which Warjiyo said could push up 10-year U.S. Treasury yield to between 3% to 3.3% by end-2022.
BI’s RRR hikes, which will reduce commercial banks’ demand to purchase government bonds, could be the main tool to ensure attractive yield differentials for Indonesian assets, even without rate hikes, he said.
Before the pandemic, Indonesia used to maintain a 450 bps rate differential with UST yields, but Warjiyo said such level may not be required to ensure capital inflows.
The governor said he did not expect any negative impact from Indonesia’s recent export ban on palm oil and its raw material on the current account outlook.
BI this month downgraded its forecast for 2022 GDP growth to 4.5% to 5.3%, from 4.7% to 5.5%, due to a weakening global growth and an expected drop in demand from trade partners.
Warjiyo said economic growth in the January-March quarter was “good”, though likely below 5% on an annual basis.
($1 = 14,455.0000 rupiah)
(Reporting by Gayatri Suroyo and Ed Davies; Additional reporting by Stefanno Sulaiman; Editing by Hugh Lawson)
