– Indonesia’s c.bank surprises with hefty RRR hikes, eyes Fed

JAKARTA — Indonesia’s central bank announced on Thursday a surprise 300 basis point hike 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 steady at 3.50%, as expected. It also left two other main policy rates unchanged.

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.

All 30 economists polled by Reuters poll had expected BI to stand pat on rates throughout the first half of 2022 and raise them in the third quarter, even though the Fed looks likely to start raising interest rates as soon as March.

BI has had to adjust its policy in the past when the Fed tightened because the rupiah is among Asia’s most risk sensitive currencies and vulnerable to capital outflows.

“The decision to raise the reserve requirement ratio from March suggests that rate hikes will come sooner than we had previously expected,” Capital Economics said in a note to clients.

“However, when the rate hike cycle does begin, we think it will be gradual,” the note said, predicting BI would raise its main policy rate by 25 bps this year with more increases in 2023.

Policy makers have been wary about the rupiah being undercut by the Fed’s tapering, though analysts say this time could be different 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.

BI cut its main policy rates by a total of 150 bps during the COVID-19 pandemic and launched a quantitative easing program, but top officials said it would begin to pare down monetary stimulus this year and focus on keeping financial markets stable. Its last rate cut was in February, 2021.

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