Indonesia cbank surprises with hefty RRR hikes to steady rupiah before Fed

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  • BI keeps key interest rate at record low of 3.50%
  • In surprise move, BI to hike RRR by 300 bps over 8 months
  • BI has eye on rupiah ahead of likely Fed tightening
  • Move suggests rates hikes may come sooner -Capital Economics

JAKARTA, Jan 20 (Reuters) - Indonesia's central bank announced on Thursday a surprise 300 basis points of staggered hikes in the reserve requirement ratio (RRR) for banks over the next eight months, in one of its first concrete signs of monetary tightening.

At its first policy meeting of the year, Bank Indonesia (BI) kept its benchmark 7-day reverse repurchase rate (IDCBRR=ECI) steady at 3.50%, as expected in a Reuters poll. It also left two other main policy rates unchanged. read more ]

But in a sign that BI has a keen eye on the U.S. Federal Reserve's anticipated tightening and potential jolts to Indonesian financial markets, Governor Perry Warjiyo announced three RRR hikes, starting with 150 basis points in March, 100 bps from June and another 50 bps from September to contain liquidity.

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"For the time being our focus is on maintaining stability amid normalisation by the Fed, while at the same time supporting the economic recovery," he said in an online news conference.

In total, BI will absorb about 200 trillion rupiah ($13.95 billion) of liquidity with the RRR moves, Warjiyo said, but he assured that banks will still have enough for lending and buying government bonds.

Warjiyo later told a call with investors that liquidity will remain larger than pre-pandemic levels after the hikes, and no significant impact to money market rates is expected. read more

Since 2020, BI had cut interest rates by 150 bps and injected a total of 874.4 trillion rupiah ($61 billion) to cushion the economic fallout from the COVID-19 pandemic. BI said its quantitative easing was among the biggest in emerging markets.

On interest rate policy, Warjiyo said BI will start to consider a hike once it sees inflationary pressures, adding that he is confident inflation will be within its 2% to 4% target this year.

While BI will continue to take measures to ensure the stability of the rupiah and bond yields, some flexibility will be needed, the governor said.

The policy mix was decided assuming the Fed will raise rates four times this year starting in March, he said.

BI has had to adjust its policy in the past when the Fed tightened because the rupiah was among Asia's most risk sensitive currencies.

"To us, the drumbeat of the Fed's hawkishness has become so loud of late that BI can no longer ignore it and retain a low-rates-for-longer stance domestically," Wellian Wiranto, economist at OCBC said, adding he expects a rate hike on the tail of the Fed's likely March lift-off.

Previously, analysts polled by Reuters had not expected BI rate hikes to begin until the third quarter of this year.

Analysts have said Indonesia would fare better this time compared with previous U.S. tightening cycles as Southeast Asia's largest economy benefits from a global commodity boom, which has kept the currency relatively stable and improved the country's balance of payments. read more

On the domestic front, BI maintained all economic assumptions, including 2021 GDP growth of between 3.2% to 4.0% and 2022 growth at 4.7% to 5.5%, saying that main indicators have continued to improve.

Indonesia's economic recovery was disrupted by an outbreak of the Delta variant in July-August last year, which slowed growth to 3.51%. Analysts said economic momentum has since picked up, although they noted the Omicron variant outbreak presents a new risk. read more

($1 = 14,335 rupiah)

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Reporting by Gayatri Suroyo, Fransiska Nangoy and Bernadette Christina Munthe Editing by Ed Davies and Kim Coghill

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