Bank Indonesia is expected to continue on its easing cycle and lower rates during its meeting on 16-17 March. The central bank has usually gone on board with a cycle of rate cuts or hikes if there were changes made to monetary policy in adjoining months. Given the low inflation and rebounding rupiah, the current scenario seems to be a chance for BI to continue with the easing cycle in order to revive growth. This is also consistent with the Indonesian government’s intention, after urging the central bank to consider lowering its policy rate to 4-5%.

The BI is still to achieve any desirable results with two continuous reductions. Looking into the trade indicator, as of January, goods exports have declined for the 16th consecutive month and are likely to further decline in February. Even if the slowdown in regional trade is partially due to poor external sector performances, 2015’s annual growth reached 4.79%, the lowest since 2009, implying an overall economic slowdown. The government will have to undertake more measures to spur foreign investments that were announced in February to attain the target of 5.2%-5.6% for 2016.

However, there are downside risks to further rate cuts. After rupiah depreciated in 2015, it has recovered to levels seen one year ago against the US dollar. Further easing of monetary policy might discourage the strength of rupiah. Even though the currency’s pace of rebound has been stable in spite of two rate cuts, the next cut might confirm that the BI has embarked on a cycle, setting off sell-offs.

Moreover, the accelerating inflation rate is also worrisome; accelerating up to 4.42% y/y in February after cutting rates in the earlier two months. Indeed, inflation is still within the central bank’s target rate of 3%-5%, providing the bank with room for easing, but this will need a delicate balance to ensure stability.

In all, the BI is expected to further lower rates by 50bps before 2016-end, though a BI senior official had stated that the bank cannot lower its key interest rate to as low as 4% if annual inflation remains about 4%.