Bank Indonesia (BI), which cut its rate by a total of 75 basis points in the first three months of the year, acknowledged that economic growth in the first quarter of this year was below its expectation and lowered its 2016 growth forecast to 5.0-5.4 percent from a previous forecast of 5.2-5.6 percent.
The BI added that the transmission of its monetary policy was improving so preparations to reformulate its policy rate was continuing.
In April the central bank said it would change its benchmark policy rate from the current 12-month BI rate, currently at 6.75 percent, to the BI 7-day (Reverse) Repo rate, currently at 5.50 percent.
The new rate structure, which will take effect Aug. 19, also includes a symmetrical and narrower interest rate corridor where the floor (DF rate) and the ceiling (LF rate) will be 75 basis points below and above the 7-day reverse repo rate.
The BI's guidance of possibly using room for monetary easing is new compared with its previous statement, a likely reaction to annual growth in the first quarter of this year that was 4.92 percent, below its forecast of 5.1 percent and down from 5.04 percent in the fourth quarter of last year.
Although BI lowered its growth forecast for this year, it expects growth to rebound from the first quarter due to fiscal stimulus linked to accelerated infrastructure spending, a package of measures to boost competitiveness and improve the investment climate, and from its easier monetary policy.
BI also said macroeconomic stability was "well maintained," referring to the inflation rate that remains within its target range of 4.0 percent, plus/minus 1 percentage point, an improving current account deficit and a relatively stable exchange rate.
Indonesia's inflation rate eased to 3.6 percent in April from 4.45 percent in March and the central bank forecast inflation around the midpoint of its target range by the end of this year.
Bank Indonesia issued the following statement: