Reserve Requirements Hiked Three Percentage Points to 8% in Indonesia

September 3, 2010

Bank Indonesia released a statement after surprising analysts with an increase to 8% from 5% in in reserve requirements, which could herald interest rate tightening before much more time elapses.  The benchmark rate was not changed yet, however, and will remain at 6.5% where it’s been since a 25-basis point cut in August 2009.  That reduction capped a series of easings over nine consecutive months and totaling 300 basis points in size.

Officials have become increasingly alarmed about inflation, which presently exceeds the 4-6% target corridor, and about excess money market liquidity.  The statement worries,

The Board of Governors is especially concerned about the rising trend in inflationary pressure. The overall CPI inflation at August 2010 reached 6.44% (yoy). Alongside this, core inflation in August 2010 came to 4.53% (yoy). Inflation in volatile foods remains strong despite easing slightly from the preceding month, while inflation in administered prices continues at a brisk pace due to a rise in electricity billing rates.

Indonesian GDP was 6.2% greater than a year earlier in the second quarter of 2010.  There is a current account surplus, and the fiscal deficit is smaller than 2.5% of GDP.  The Board of Governors “regards present conditions [in the financial system] as well under control with support from the robust condition of the banking sector despite risks and improvement in the banking intermediation function.”  The statement from Bank Indonesia leaves the door open to additional actions coordinated with the government in order to preserve price stability.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



Comments are closed.