Indonesia's central bank maintained its benchmark BI rate at 7.50 percent but lived up to its guidance from last month that it had room to ease its policy by lowering the reserve requirement by 50 basis points to 7.50 percent to "boost bank financing capacity to support escalating economic activity during the third quarter and beyond."
Bank Indonesia (BI), which cut its rate by 25 basis points in February, also repeated its view from October that continued improvement in macroeconomic stability is "making room for monetary policy easing" and that it remains confident that inflation will be at the lower end of its target while the current account deficit is seen at 2 percent of Gross Domestic Product.
However, BI is also acutely aware of the uncertain conditions in global financial markets from the expected increase in U.S. rates along with what it described as "the diversity of monetary policies form ECB, BoJ, and PBoC," and said it would "remain vigilant in easing its monetary policy," tempering any expectations for a series of rate cuts.
The BI's guidance from October had raised expectations among some economists that it would ease its policy stance today while others had expected the BI to keep its policy steady given the concern that the rupiah's exchange rate could weaken in response to a rate cut, dealing a setback to the central bank's efforts to bring down inflation following a jump last year after the government cut fuel subsidies, pushing up fuel prices.
Indonesia's inflation rate immediately jumped to 8.36 percent in December last year and has remained well-above the BI's target of 4.0 percent, plus/minus 1 percentage point this year.
But in October the inflation rate eased to 6.25 percent from 6.83 percent in September, for a year-to-date rate of 2.16, BI said, adding that core inflation eased further to 5.02 percent in October, reflecting appreciation of the rupiah, limited domestic demand and anchored inflation expectations.
Last month the rupiah appreciated after renewed optimism about the economic outlook for the country following new government policy packages, intervention by the BI to stabilize the currency, and what it described as a "dovish announcement" by the U.S. Federal Reserve in September.
During the third quarter the rupiah appreciated on average by 5.35 percent to 13,873 to the U.S. dollar but it is still down 9.4 percent this year, trading at 13,737 today.
Indonesia's economy expanded by an annual 4.73 percent in the third quarter, up from 4.67 percent in the second quarter, due to higher government spending, but sluggish growth in trading partners and low commodity prices "precipitated a deeper contraction in exports," BI said.
Although it expects growth to continue in the fourth quarter as government infrastructure projects gains momentum, the BI said growth was projected "at the lower end of the 4.7-5.1% range for 2015. Last month the BI had only forecast growth in the 4.7 to 5.1 percent range.
For 2016 growth is expected to increase to 5.2 to 5.6 percent.
Bank Indonesia issued the following statement: