Bank Indonesia is considering raising the statutory reserve requirement faced by commercial banks in a move aimed at containing inflationary pressures caused by April’s scheduled fuel-price increase.
The plan would increase the proportion of funds banks are forced to set aside with BI, choking commercial lenders’ capacity to offer loans to borrowers.
“Raising the minimum reserve requirement is on our list,” deputy governor Hartadi A. Sarwono said on Monday.
The central bank opted not to cut its benchmark interest rate last week, despite slowing inflation, as it anticipated lurking inflation pressure following government plans to raise the price of subsidized fuel by 33 percent in April. BI maintained its policy rate at 5.75 percent.
BI governor Darmin Nasution said last week that the fuel price increase could push the inflation rate to 6.8 percent this year, above the upper limit of the central bank’s inflation target of 3.5 percent to 5.5 percent this year.
Also, low borrowing costs have left the system with excess liquidity, creating further inflation pressure.
Hartadi said BI was still considering whether excess liquidity would last long, or whether a permanent solution, like increasing reserve requirements, would be needed. “If excess liquidity persists, we might raise the reserve requirement. If not, we wont.” Hartadi said.
Hartadi said BI raised the yield of short-term bonds to drain liquidity from the banking system. He added that BI’s efforts to absorb short-term debt notes were focused on its regular market operations, “until the market realizes that BI is serious in containing a second-round effect to inflation.” Second-round inflation refers to rise in prices of goods other than fuel prompted by the increase in the cost of fuel.
BI considers the reserve requirement as one of its monetary policy tools. The reserve requirement is the amount of money that banks are compelled to set aside with the central bank, receiving only low interest payments.
In June 2011, the central bank required lenders to set aside 8 percent of their foreign exchange deposits as reserves, up from 1 percent at the beginning of the same year.
It also linked lenders’ statutory reserve requirements to their loan-to-deposit ratios in March 2011 in a bid to stimulate lending.
Eric Alexander Sugandi, an economist at the Standard Chartered Bank, said that BI is likely to increase the reserve requirement after the fuel prices increase.
“They cannot cut the BI rate because of inflation pressure, nor can they cut it because growth is expected to slow,” Eric said.
The government is set to raise the price of subsidized fuel to Rp 6,000 (65 cents) in a bid to curb the impact of subsidy spending on the state budget. The government recently revised its economic growth forecast to 6.5 percent in 2012, from an earlier 6.7 percent estimate. Last year Indonesia’s economy grew 6.5 percent.
Purbaya Yudhi Sadewa, an economist at Danareksa Research Institute, said the central bank should be careful in raising the reserve requirement because it could quickly drain liquidity from the financial system, even as growth slows.