(Reuters) –Bank Indonesia Governor Perry Warjiyo stated that although the central bank doesn’t expect inflation to increase above 3% by 2023, the bank will start to communicate possible changes in its policy rates before then to prevent any market shocks.
Warjiyo stated that the central bank would not hesitate to intervene in the market to stabilize the rupee exchange rate.
As the economy looks brighter, the Indonesian Central Bank plans to begin reducing liquidity within the banking sector next year. It will also tighten loose monetary policy it has used since the beginning of the pandemic.
BI has injected $860 trillion rupiah ($59.74billion) in liquidity into the financial market since last year. It also purchased direct bonds from governments and slashed key interest rates by 150 basis point to offset the impact of the recent health crisis.
In Indonesia, prices are rising, although they remain relatively mild, as opposed to many of the other countries in recovery from the pandemic slump. In November, the consumer inflation rate rose to 1.75 percent. This is a 17-month record.
Warjiyo stated that BI would keep the main rate at a record low 3.50%, until inflation starts to accelerate.
He stated that inflation is expected to rise above 3% in the second and third quarters of 2023, as a projection during Reuters Next conferences.
He said that interest rates decisions must be forward-looking, preemptive and front loaded by their nature.
Analysts believe that BI should consider raising rates starting in 2022, as supply chain disruptions worldwide and rising commodity prices have already begun to affect production costs.
BI targets inflation between 2% to 4% next year.
Warjiyo stated that BI will continue to increase liquidity in the coming year and will signal toward the end the direction of its policy, depending on the trends in inflation or growth.
Bank Indonesia will notify the markets of details about its liquidity reduction program before they are implemented, he added, adding that banks can still lend money and buy government bonds.
Warjiyo stated that central banks could raise their reserve requirements to absorb liquidity.
To avoid large outflows, Indonesia will keep the yield differential between Indonesian Treasury yields and rupiah assets attractive.
Warjiyo stated that the country has a better chance of weathering any volatility in foreign currency than it was in the past when Fed tightening caused heavy outflows to emerging markets and sent the rupee into a steep decline.
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