JAKARTA (Reuters – Indonesia’s Central Bank may raise its Reserve Requirement Ratio (RRR), if inflation picks up. The option to increase interest rates is its last resort.

Bank Indonesia (BI), has begun normalizing some aspects of its ultra-loose monetary policy during the pandemic, by announcing three increases in RRR by 300 basis point between March and September.

Destry Damayanti stated that BI would be cautious to ensure that banks are able to borrow if liquidity is still adequate.

Her remarks came at a time when inflation expectations are building in Southeast Asia’s biggest economy. Despite the fact that March’s inflation rate was 2.64%, it is still within BI’s target range between 2% and 4%.

BI believes inflation should remain within the target range for this year. However, plans by government to increase subsidised energy prices may pose a risk.

Destry, BI’s second highest ranking official said that inflation and trade disruptions resulting from a prolonged conflict in Ukraine would be critical to Indonesia’s economic health in the near term.

She said that BI would be ready to adjust its benchmark 7 day reverse repurchase rates if required.

However, the timeframe for the initial rate rise would depend on whether all other instruments fail to address the inflation problem.

After having been reduced 150 basis points by the pandemic, today’s benchmark rate stands at 3.50%.

Destry reiterated the fact that BI’s monetary policies will respond to any increase in fuel prices by focusing on core inflation and not reacting directly.

Core inflation remains manageable, and BI still has not seen the type of increased demand in developed economies following the removal of COVID-19 restrictions.