Emerging markets: Bank Indonesia surprise many observers with 300 basis points of staggered hikes in the reserve requirement ratio


JAKARTA, Jan 21 (Reuters): Bank Indonesia has surprised many business observers with 300 basis points of staggered hikes in the reserve requirement ratio for banks over the next eight months in one of its first concrete signs of monetary tightening.

The rupiah, a popular carry trade for investors, dipped 0.1%, while the Malaysian ringgit firmed 0.1%. Some analysts and economists detected a potential shift in Bank Negara Malaysia (BNM) from its policy statement.

On Thursday, central banks in Malaysia and Indonesia held their key policy rates steady ahead of the Fed's Jan. 25-26 meeting, where investors will be keenly watching out for hawkish signals.

"The central bank omitted a relatively dovish sentence from its statement, which we interpret as suggesting BNM no longer views policy easing as being more likely than tightening in the near term," analysts at Barclays said.

Stocks in Kuala Lumpur dipped on Friday and were heading for their worst week since August 2020 with a more than 2% drop.

Meanwhile, South Korea and Taiwan stocks fell more than 1% each on Friday (Jan 21), leading falls across Asia's emerging markets, after US stocks took a hit overnight, while fears that the Federal Reserve may tighten policy more aggressively kept a lid on currencies.

Shares in Taiwan closed 1.8% lower, while in South Korea they slid as far as 1.5% to their lowest in more than a year - as their tech sectors caught the chill from the Nasdaq, which has found itself in correction territory.

The US dollar took a breather on Friday as investors picked up Treasuries, stalling a rise in yields, though markets have now priced in four interest rate hikes by the Fed this year, including one as soon as March.

The prospect has also placed Asia's central banks on watch, leaving policymakers with the difficult decisions of protecting economic recovery in their countries while maintaining stability and stemming potential outflows.

Emerging Asian "economies are not only disadvantaged in access to dollar funding under constraint, but are acutely vulnerable to capital outflows from a double whammy of rising long-end 'risk-free' UST (Treasury) yields and rising 'risk premium'," Mizuho said in a note.

After a week that saw data show weakening consumption in China, the central bank stepped up efforts to ease policy, with stocks set to snap two straight weekly losses and eke out 0.1% gain. Despite policy easing, the yuan is set to book a second weekly gain.

Sources told Reuters that China will cut the interest rates on a key monetary policy tool by which financial institutions can obtain temporary liquidity from the central bank. - Reuters

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