Indonesia's central bank cut its benchmark BI rate by 25 basis points to 7.50 percent, a move that will be welcomed by the government, saying it was "confident that inflation will remain within the target corridor" due to controlled core inflation, lower international oil prices and better food security.
Bank Indonesia (BI), which raised its rate by 25 basis points in November to ensure that a government hike in fuel prices did not boost inflation permanently, also said the recent "contractionary phase of the economic cycle, which has persisted for several years, passed its nadir in the third quarter of 2014" and growth in 2015 will top that of 2014.
Indonesia's Gross Domestic Product shrank by 2.06 percent the fourth quarter from the third quarter but compared with the fourth quarter of 2013 it expanded by 5.01 percent, up from a rate of 4.92 percent in the third quarter.
BI forecast 2015 growth of 5.4-5.8 percent - up from 2014's 5.1 percent - bolstered by expansive government investment, including infrastructure development, which is supporting strong domestic demand although household consumption has eased slightly in line with the government's policy.
Exports have contracted "relatively deeply" due to ebbing demand from emerging markets and the decline commodity prices, but the planned monetary stimulus from the European Central Bank (ECB) is "expected to spur an influx of foreign portfolio capital to emerging market countries, including Indonesia, despite potential global financial market uncertainty and volatility."
Indonesia's inflation rate eased to 6.96 percent in January from 8.36 percent in December while core inflation rose marginally to 4.99 percent from 4.93 percent. The BI's 2015 inflation target is 4.0 percent, plus/minus one percentage point.
Indonesia's balance of payments improved in the fourth quarter due to narrower current account deficit - the oil and gas deficit shrank - while the capital account showed a large surplus, backed by foreign direct investment (FDI) flows.
The country's foreign exchange reserves expanded further to $114.2 billion in January from $111.9 billion at the end of December while the rupiah currency depreciated by an average of 3.9 percent in the fourth quarter from the third quarter to 12,244 per U.S. dollar in light of broad dollar appreciation.
BI said it views the change in the rupiah's exchange rate as beneficial in terms of the current account deficit by lowering the import of consumer goods and improving the country's export competitiveness, especially of manufactured exports.
Bank Indonesia issued the following statement: