Indonesia cut its main interest rate on Thursday to the lowest level in two years and said there was room for further cuts to help sustain a pick up in growth in Southeast Asia's biggest economy.
With inflation rates falling, analysts also see some scope for more easing. But they said future cuts may be limited because Indonesia's policy rates are approaching levels seen in more advanced economies, such as New Zealand.
Indonesia's stock market, which has been boosted by foreign cash, hit a record high following the rates decision. The rupiah dipped on the prospect that even lower rates suggested by the central bank could lead to a capital outflow.
"Global markets are currently in a risk-averse situation. I think we should strike the right balance between stimulating the economy while maintaining inflation and preventing exchange rate volatility," said economist Helmi Arman of Bahana Secrities.
The central bank cut its BI target rate by 25 basis points to 8.25 percent, its lowest since the rate was introduced in July 2005 at 8.5 percent before it was ramped up to a peak of 12.75 percent to fight off an inflation scare. The latest cut was the 13th in 14 months and brought the total easing over the period to 450 basis points.
The central bank said there was scope to cut rates further this year due to tame inflation. Bank Indonesia spokesman Budi Mulya said inflation by the end of the year should be between 5-7 percent. Headline annual consumer inflation fell to 5.77 percent in June, the second lowest monthly reading since prices spiked late in 2005 after the government ramped up domestic fuel prices.
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