Slower inflation in January gives the central bank room to further cut rates, analysts say, although not as aggressively as previously due to the need to guard against possible upward inflationary pressures and global rate trends ahead.
Economist Fauzi Ichsan of Standard Chartered Indonesia said he believed Bank Indonesia (BI) would likely lower its key rate by a quarter percentage point to 9.25 percent from 9.5 percent at present.
This would be made possible by the still favorable inflationary situation, and the stability of the rupiah.
"Inflation has continued to ease. Increases in food prices are usually one-offs, rather that continuing trends, as the government provides security of supply and distribution," Fauzi said.
"Indonesia's trade balance and forex reserves have also been strengthening, all of which has helped keep the rupiah stable."
However, Fauzi ruled out the possibility of a rate cut of more than 25 basis points (bps) for now, as the aforesaid conditions, favorable as they were, were still not favorable enough to permit a bigger rate cut.
The central bank cut its benchmark BI rate by a quarter percentage point to 9.5 percent last month after inflation in December eased to 1.2 percent month-to-month and 6.6 percent year-on-year.
BI had previously cut its rate five times, by 50 bps or half a percentage point each time, since August in line with the fall in inflation from 17 percent at the beginning of 2006.
In January, consumer prices rose at a monthly rate of 1.04 percent, and an on-year rate of 6.26 percent.
BI Governor Burhanuddin Abdullah in comments on the latest inflation data said "the room to cut interest rates remains, but at a slower pace."
BI's Board of Governors is scheduled to hold its next policy meeting on Feb. 6.
In this year's budget, the government has forecast an inflation rate of 6.5 percent, and a BI rate of 8.5 percent.
The BI rate is used as the reference for setting bank rates, and has a knock-on effect on consumer spending and investment. To the chagrin of the central bank and the government, the recent slowing down in inflation and BI's rate cuts have not yet been translated into lower bank rates.
The yields on Indonesian sovereign bonds are also based on the BI rate, which thus has the potential to affect the rupiah in terms of the attractiveness of rupiah-based assets to investors based on the spread between the BI rate and other global rates.
Fauzi said a spread of 4 percentage points between the BI rate and the U.S. Federal Reserve rate was enough to maintain stability. The Fed kept its key rate unchanged this week at 5.25 percent.
Economist Ryan Kiryanto of Bank Negara Indonesia (BNI) agreed there was a possibility of another rate cut to 9.25 percent, but leaned more toward the central bank keeping its rate as it is.
"January's 1.04 percent monthly inflation is actually too high, and February's inflation may be between 0.5 and 1 percent," he said.
"There is still room for more rate cuts, but it would be safer to keep the rate at 9.5 percent as there is still 11 months to go in the year."
In a note to investors, as quoted by Bloomberg, economist Anton Gunawan of Citigroup Indonesia said he expected BI to cut its rate in April, July and October.
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