The central bank cut its benchmark interest rate Friday for the eighth straight month to 6.75 percent to accelerate bank lending, strengthening the already sound macroeconomic framework, and promoting a more robust real sector.

The rate cut however leaves "limited" room for the central bank to cut its rate further ahead, Bank Indonesia (BI) said in a statement. BI has cut its rate by 275 basis points from 9.5 percent in November 2008 as inflation has slowed.

"The cut is expected to facilitate the acceleration of lending," acting BI Governor Miranda S. Goeltom said in a press conference.

"Latest data shows bank lending is quite high. It is expected banks can accelerate credit expansion."

As of April, lending reached Rp 1,780.9 trillion, increasing from Rp 1,745.6 trillion in January, according to BI data.

Judging by its key indicators, the banking sector remained healthy as of May, as seen from the relatively high capital adequacy ratio (CAR) of 17.3 percent, while the rate of non-performing loans (NPLs) was still below the BI's maximum tolerance of 5 percent.

Overall the banks have not been as aggressive as BI in cutting their lending rates. Bank Danamon chief economist Anton Gunawan said this was because the  banks should maintain liquidity and a strong capital base in these conditions, while facing a higher threat of rising NPLs because of the downturn.

He estimated that bank lending rates have therefore been cut by only 1 percent on average since the beginning of this year.

A lower BI rate would be followed by lower rates for BI certificates (SBIs), which may prompt banks to start channeling loans instead of putting money in SBIs or government bonds.

"But it won't be that fast, particularly as banks prepare to channel loans for government-led infra-structure projects [which may commence in the second half of this year] that will deplete their funds," said Anton.

Lending can help businesses to expand, which will spur growth. BI estimated the economy grew by between 3.7 percent and 4 percent in the second quarter this year, bringing full-year growth to between 3.5 percent and 4 percent.

Inflation is projected to slow to below 5 percent this year, Miranda said.

The increase in several commodity prices worldwide has caused inflationary pressures, but can be compensated by a stronger rupiah and weakening domestic demand.

The rupiah appreciated 9.9 percent against the American greenback in the second quarter, providing a positive contribution to Indonesia's balance of payments.

As of June, the foreign exchange reserves stood at US$57.6 billion, equal roughly to 5.6 months of import financing.

BI's language signals the near-end of the rate easing cycle, Citi analyst Johanna Chua said, expecting BI to have one more cut this year.

"We have been long expecting BI to cut the policy rate eventually to 6.5 percent by August and maintain that view.

“We had earlier raised concerns that the language would be less dovish now than before as oil prices rise, growth trajectory has improved and BI’s focus will likely shift on next year’s inflation trajectory," she said.

But despite more limited room for rate cuts, government bonds and the rupiah would remain positive, " she concluded.

The next key event that may impact upon the market will be the presidential election on July 8.

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