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Lowest Indonesia inflation in 6 years widens room for a rate-cut

[JAKARTA] Indonesia's annual inflation rate cooled to the lowest in six years in December, which might pave the way for the central bank to cut a benchmark rate held at 7.50 per cent since February 2015.

High inflation has been one of the issues keeping Bank Indonesia (BI) from cutting its policy rates. Annual inflation topped 8 per cent in December 2014, after a fuel price hike, and stayed above 6 per cent most of 2015.

The rate cooled to 3.35 per cent in December, Indonesia's statistics bureau said on Monday, from 4.89 percent in November. But it was higher than analysts' forecast of 3.00 per cent in a Reuters poll.

The December inflation rate will increase the chance that BI will reduce its benchmark rate to lift growth, which has fallen to its lowest level since 2009.

BI's January meeting is scheduled tentatively for Jan 13 or 14, according to its website. "There is indeed room for BI to cut rates," said OCBC economist Wellian Wiranto in Singapore. "As long as global market sentiment remains relatively calm, we see it cutting by 25 basis points this month." On Dec 17, when BI had a meeting right after the Federal Reserve raised US interest rates, it said the room to ease monetary policy was "more open".

BI officials cited easing inflation, a shrinking current account deficit and less uncertainty in global markets after the first Fed hike in nearly a decade as factors improving the chance of easing. But they would not confirm when the rate would be cut.

The key is the rupiah, which was often fragile during 2015. In the last two weeks of the year, after the Fed hike, it gained about 2 per cent. But it weakened 0.8 percent during intraday trading on Monday.

Gundy Cahyadi, economist at DBS, think BI will wait longer before cutting rates. "BI remains focused on managing volatility of the rupiah. Despite the rupiah recouping some grounds at the end of 2015, the unit remains at the mercy of the broad USD tone for now." Even with eased inflation, "we don't think that BI will jump the gun and rush to lower its policy rate as yet." he said.

The central bank has relaxed some lending rules in 2015 in an effort to loosen monetary policy without moving key rates and jump start economic growth, expected at the slowest since 2009 for full-year 2015.