(Reuters) -Bank Indonesia (BI) Governor Perry Warjiyo said the central bank does not expect inflation to rise above 3% until 2023, but the central bank would start communicating possible changes to its policy rates ahead of time to avoid any market shocks.
Warjiyo also said on Friday the central bank will not hesitate to “come to the market” to stabilise the rupiah exchange rate
With the economic outlook brightening, the Indonesian central bank plans to start reducing liquidity in the banking system next year as it starts to tighten up loose monetary policy that has been rolled out since the start of the pandemic.
BI has injected more than 860 trillion rupiah ($59.74 billion) of liquidity into the financial system since last year, including through direct purchases of government bonds, and slashed key rates by 150 basis points to help cushion the economic hit from the health crisis and anti-virus measures.
Unlike the case in many other economies which are recovering from the pandemic slump, price pressures in Indonesia remain mild, but they are creeping up. The consumer inflation rate in November rose to 1.75%, a 17-month high.
Warjiyo reiterated that BI will keep the main policy rate at a record low 3.50% until inflation shows signs of accelerating.
“Our current projection is inflation starting (to rise) above 3% and moving up towards 4% sometimes in second quarter or early third quarter 2023,” he said in an interview during a Reuters Next conference.
“But by nature, interest rate decisions need to be forward looking, needs to be preemptive, need to be front loading,” he added.
Some analysts believe BI will need to start consider rate hikes from mid-2022 as global supply chain disruptions and high commodity prices had already started affecting production costs.
BI’s target inflation next year is between 2% and 4%.
Next year BI will mop up liquidity and it will start signaling toward the end of the year further policy direction, depending on trends in inflation and growth, Warjiyo said, reiterating comments earlier this year.
Bank Indonesia will communicate with markets the details of the liquidity reduction plan ahead of time, he said, adding that the central bank will make sure the move will not compromise banks’ ability lend or purchase government bonds.
Tools which the central could use to absorb liquidity would be include raising banks’ reserve requirements, Warjiyo added.
Meanwhile, Indonesia will make sure that yield differential between rupiah assets and US Treasury yields will remain attractive for investors to avoid massive outflows as the U.S. Federal Reserve is expected to start raising rates next year.
But Warjiyo said the country is in much better condition to weather any foreign exchange volatility than in the past, when Fed policy tightening triggered heavy outflows from emerging markets, sending the rupiah into a plunge.
($1 = 14,395 rupiah)
(Reporting by Fransiska Nangoy, Bernadette Christina Munthe, Jane Wardell; Editing by Kim Coghill)
