Bank Indonesia to reduce liquidity in 2022

JAKARTA (CNA) – Indonesia’s central bank plans to reduce the amount of excess liquidity in the banking system next year without disrupting lending, but will keep interest rates low until it sees signs of inflation rising, its governor said yesterday.

This would reflect a shift in Bank Indonesia’s (BI) monetary policy stance to “pro-stability” in 2022, from “pro-growth” currently, Perry Warjiyo said, adding that the bank’s other policies will remain supportive of the economic recovery.

The reduction in excess liquidity would be BI’s first move to unwind its ultra-loose policy, aimed at helping Southeast Asia’s largest economy navigate the COVID-19 pandemic.

Warjiyo’s remarks, made at an annual gathering with financial stakeholders, were in line with his earlier comments on 2022 policy tightening plans, even as BI downgraded its 2021 economic outlook after disappointing third-quarter growth.

“Excess liquidity in the banking system, which is currently very large, will be reduced gradually and cautiously so as not to interfere with the ability of banks in lending and purchasing of state securities to finance the state budget,” he said.

Indonesia’s central bank plans to keep interest rates low until it sees signs of inflation rising. PHOTO: AFP

“The policy of low interest rates … will be maintained until there are early indications of rising inflation.”

Annual inflation hit a five-month high of 1.66 per cent in October but has remained below the central bank’s two to four per cent target range since mid-2020.

BI has injected more than IDR860 trillion (USD60.26 billion) of liquidity into the financial system since last year, including through direct purchases of government bonds, and delivered 150 basis points worth of rate cuts to help the economy withstand the pandemic.

Indonesia’s economy grew by a slower-than-expected 3.51 per cent in the third quarter as restrictions to fight a deadly COVID-19 wave weighed on activity, but some of those curbs have been relaxed since late August.

BI cut its 2021 growth forecast to between 3.2 per cent and four per cent from 3.5 per cent to 4.3 per cent previously, Warjiyo said.

But it slightly upgraded its outlook for 2022, expecting the economy to expand between 4.7 per cent and 5.5 per cent next year from a previous range of 4.6 per cent to 5.4 per cent, he added.