Bank Indonesia (BI) has cut its current and future benchmark interest rates four times this year, most recently in June, by a total of 100 basis points, but most economists had expected the central bank to cut rates another time today to boost economic growth further.
But BI said it believed that the macroeconomy was stable, reflected by low and stable inflation that is within its target corridor, that the current account deficit was healthier and the exchange rate of the rupiah was relatively stable.
Although economic growth "remained limited" in the second quarter, BI said it expected growth to continue to gain momentum on the back of its looser policy, coupled with fiscal stimulus in the form of the government's tax amnesty bill and other measures.
Household consumption is seen improving, based on recent retail sales data and stronger car sales, while investment growth showed significant signs of improvement. Exports remain weak although several commodities showed early signs of recovery, BI said.
The BI confirmed its 2016 growth forecast of 5.0 to 5.4 percent, up from 4.8 percent in 2015. In the first quarter of this year, Indonesia's economy grew by an annual 4.92 percent, down from 5.04 percent in the previous quarter.
But BI also acknowledged that the global economy is expected to slow from uncertainty linked to Britain's exit from the European Union (EU), while China and India were also expected to grow slower. The impact of Brexit on the United States is expected to delay a further rate increase until the end of this year.
Indonesia's currency, the rupiah, has risen in response to an easing of uncertainty around the U.S. fed funds rate, the limited effect on financial markets from Brexit and positive sentiment around the government's tax amnesty bill that is estimated to bring in 165 trillion rupiah to the state.
The rupiah was trading at 13,111.7 to the U.S. dollar today, up 5.2 percent this year, with the BI also saying it had risen as non-resident capital inflows surged after a slight correction in response to Britain's vote to leave the EU.
Indonesia's headline inflation rate rose slightly to 3.45 percent in June from 3.33 percent in May, but this is the lowest rate during Ramadan for the past four years and within the BI's target of 4.0 percent, plus/minus 1 percentage point.
Core inflation also remained under control in line with limited domestic demand, appreciation of the rupiah and anchored inflation expectations, BI said. Core inflation in June rose to 3.49 percent from 3.41 percent.
Bank Indonesia issued the following statement: