Gayatri Suroyo, Fransiska Naangoy

JAKARTA (Reuters – Indonesia’s central banking announced on Tuesday that it would increase the reserve requirement rate (RRR), for banks. It expects inflation to rise slightly beyond its target range, but kept interest rates at a new record low.

Bank Indonesia (BI), announced a speedier pace of RRR rises. They ordered banks to reserve 7.5% from July, and 9% starting September. This is in contrast to BI’s previous policy plan, where BI had announced three staggered RRR increases this year, from 3.5% to 6.5% September.

BI’s benchmark 7-day reverse repurchase rates remained at a record low 3.50% as predicted by 25 out of 27 economists polled. They also maintained their two main rates.

During the pandemic BI cut interest rates totalling 150 basis points. They also injected millions of dollars into the system. RRR rises were their first attempt to normalise monetary regulations.

Perry Warjiyo, Governor, stated that inflation this year will rise slightly above BI’s 2%-4% target range, but will fall to the target next year. He described it as “manageable”.

Warjiyo stated that the inflation outlook “reduces need to respond via interest rates like other central bankers.”

He previously stated that BI would keep interest rates at an all-time low until there is evidence of core inflation pressure.

This was the highest annual inflation rate in two years, at 3.47%.

Last week, the government received parliamentary approval for $24 billion in energy subsidies to maintain inflation control.

Radhika Rao (Senior Economist, DBS Bank, Singapore) stated in an email that energy subsidies have reduced inflation risk.

Rao said that this, along with a limited rupiah appreciation compared to regional peers, lowered Bank Indonesia’s urgency to normalize policy. He also noted how RRR was being used as a liquidity absorber.

The first quarter saw Indonesia’s economy grow by 5.01%, thanks to a surge in commodity exports and the lifting of COVID-19 restrictions.