The fall in the consumer price index (CPI) in January should provide more space for the monetary authority to ease its policy stance and help spur the country'€™s sluggish economic growth, economists have said.

 Wai Ho Leong and Rahul Bajoria, economists at Barclays Bank, said in Jakarta on Monday that Bank Indonesia (BI) might further lower its interest rate sooner than expected in the wake of a fall in the inflation rate in January.

'€œOur base case is for a rate cut at the March policy meeting. However, in recent weeks, BI'€™s dovish comments and a low January CPI print suggest that a second cut in the easing cycle could potentially occur sooner, possibly as early as February,'€ they wrote in a research note on Monday.

The note was published after the Central Statistics Agency (BPS) announced that headline inflation fell 0.51 percent in January from the 0.96 percent rate recorded a month earlier. Monthly core inflation stood at 0.29 percent, while the rate for administered price and volatile components stood at -0.55 percent and 2.4 percent, respectively.

The results brought the year-on-year (yoy) inflation rate to 4.14 percent in January from 3.35 percent yoy posted in December. As in previous months, food materials contributed the most to inflation, accounting for 0.46 percent of the monthly figure.

Food prices themselves climbed 2.2 percent in January from a month earlier and surged 6.6 percent on an annual basis.

Among those posting an increase were broiler chickens, shallots, eggs, garlic and rice. At the same time, transportation costs fell after the government slashed the price off fuel in early January, with premium gasoline dropping to Rp 7,150 (52 US cents) per liter from Rp 7,400, while diesel was cut to Rp 5,950 per liter from Rp 6,700.

Leong and Bajoria said that if inflation remained low, there would be scope for further monetary easing beyond the first quarter as well, but this would also depend on external factors.

As reported before, low inflation and a relatively stable financial market '€” especially after the US Federal Reserve increased its key policy rate '€” prompted the central bank to reduce its benchmark interest rate for the first time in 11 months.

BI slashed the rate to 7.25 percent from 7.5 percent and has said there is room for further easing.

However, the easing may not necessarily be in the form of another rate cut. It could involve a lower reserve requirement ratio (GWM) or other macroprudential measures. Meanwhile, Maybank Indonesia economist Juniman said that BI might loosen its stance again during its February board of governors'€™ meeting.

According to Juniman, even though the situation is stable and the rupiah has gained ground against the US dollar, BI should proceed with another reduction of the GWM, instead of another rate cut.

'€œA 50 basis point reduction in the GWM to 7 percent will be sufficient for now,'€ he said.

Separately, Bank Mandiri economist Andry Asmoro voiced similar optimism that BI would relax its stance in the February meeting.

'€œIf the rupiah continues at the same level, the BI rate will most likely fall [in February]. Inflation will be within BI'€™s range as well,'€ he said.
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