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The recent increase in bank reserve ratios should be enough to bring inflation down in the coming months, but policy is likely to be tightened further next year, a deputy governor of Indonesia’s central bank said on Sunday.

“If the food components of inflation keep on declining because of the impact of government policy, and core inflation stays stable at this level, which is quite low, we don’t have to increase rates for the rest of this year,” Bank Indonesia’s Hartadi Sarwono told Reuters in an interview.

He was speaking on the sidelines of the two-day meeting of finance ministry and central bank deputies from the Group of 20 developed and leading emerging economies in the South Korean city of Gwangju.

Annual inflation in August hit a 16-month high of 6.44 percent, above the central bank’s year-end target of 4-6 percent.

Sarwono added that as the global economy continues to recover, policy next year would have to return to normal after record-low interest rates.

“We have already extended quite a lot of liquidity to the markets and the economy is back on track for recovery, so maybe next year is a good time to unwind liquidity and also put interest rates up,” he said.

Bank Indonesia kept its benchmark interest rate unchanged at 6.5 percent on Friday, but ordered banks to set aside more cash reserves because of the high inflation.

Lenders will be required to set aside 8 percent of their deposits as primary reserves, up from 5 percent, a move that may absorb Rp 50 trillion ($5.6 billion) of excess liquidity, the central bank said.

The move follows five-straight months of quickening gains in consumer prices that have highlighted the risks of Indonesia refraining from following its counterparts across Asia in raising interest rates.
 

Reuters, JG