KONTAN.CO.ID - JAKARTA. Indonesia's central bank has scope to unwind 2018's interest rate hikes "cautiously", but may not have room for further cuts in reserve requirements of banks, the International Monetary Fund said in its review of Southeast Asia's biggest economy. In its annual Article IV report published on Thursday, the IMF said given inflation risks appear contained "authorities have space to partially and gradually unwind the interest rates hikes adopted in response to the 2018 EM (emerging market) selloff, unless significant capital account pressure re-emerge, but need to proceed cautiously." Bank Indonesia (BI) raised interest rates six times last year by a total of 175 basis points to defend the rupiah amid outflows triggered by U.S. rate increases and the U.S.-China trade war.
Last month, BI cut its benchmark by 25 basis points, moving ahead of the Fed, which on Wednesday also cut by a quarter of a percentage point. BI Governor Perry Warjiyo has said there is room for more accommodative policy as inflation will likely stay low. BI's 2018 rate increases were paired with easier lending and liquidity rules intended to limit potential stress on the financial sector. The IMF said its assessment of current conditions suggested no room for further relaxation. "Instead, BI should assess the effects of recent relaxation of macroprudential measures," it said, adding that maintaining current liquidity buffers, including reserve requirements, would provide BI ammunition in case of possible future shocks. Warjiyo has previously said the central bank was considering further RRR reductions, after a 50-basis-point cut in July. The IMF praised BI's policy mix for being "successful" in navigating a period of volatility without sacrificing GDP growth. However, it warned that the strong presence of the central bank in the money and foreign exchange market, if sustained, "could hamper financial deepening."
