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Bank Indonesia could begin tightening monetary policy next year, including potential moves on interest rates, if the economic recovery remains on track and policy makers see signs of inflation, Governor Perry Warjiyo said Friday.
The bank’s exit strategy is to gradually reduce liquidity in the financial system “and then later, the end of next year, maybe some interest-rate action,” Warjiyo told Bloomberg Television’s Haslinda Amin. “But this is very uncertain.”
Bank Indonesia has kept its benchmark interest rate at a record low 3.50% since February as a spike in Covid-19 cases overwhelms hospitals and oxygen supplies. The government recently downgraded its forecast for the economy to 3.7%-4.5% growth this year, from 4.5%-5.3% previously.
Rather than cutting rates further right now, Warjiyo said the central bank would “maintain this low interest rate” and push banks to pass it on.
“What we’re focusing on now, we’re pushing the banks to follow suit,” he said. “We’re focusing more how to ensure the effectiveness or the transmission of our policy.”
Read more: Do-It-All Central Banks Risk Rates Flexibility With New Mission
As rising poverty and unemployment amid the pandemic send Indonesia back to lower-middle income status, the government may need to risk a wider budget deficit to accommodate higher stimulus spending and delayed tax hikes.
Bank Indonesia’s focus for the rest of the year is on keeping rates low and liquidity flush to support the economy, and maintaining a stable exchange rate, Warjiyo said.
“We need to dance with the market, to ensure the stability of the exchange rate, the government bond yield, giving some room for adjustment but measurable, controllable and stable,” he said.
The bank will closely watch how the pandemic impacts domestic consumption, the cornerstone of Southeast Asia’s largest economy. For now, exports will continue driving economic growth thanks to the recovery in U.S. and China, Warjiyo said.
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