REPUBLIKA.CO.ID,  JAKARTA/SINGAPORE - The rationale behind BI's rate cuts was that the euro zone debt crisis could spiral out of control, sparking a global recession that would crush growth and scare away foreign investors who usually hold one-third of Indonesia's debt.

Indonesia got an unpleasant taste of capital flight in September, when worries about Europe shook global markets and pushed investors toward the perceived safety of the US dollar.

Foreign holdings of Indonesian debt slipped to 31 percent in September from 35 percent in August. The country exhausted 8 percent of its foreign exchange reserves defending the rupiah, which tumbled almost 7 percent in the first half of September.

BI sprung the first of its two surprise 2011 rate cuts on Oct. 11, when the memory of September's selloff was fresh. Its policy statement made clear that the motivating factors were Europe's debt troubles and the risk of capital reversal.

But global meltdown fears have abated. The euro zone still appears to be slipping into a recession, but it looks less likely to drag down the rest of the world, particularly when the US economy seems to be picking up speed. Indonesia's economy is far more domestically focused than most of its export-sensitive Asian peers, so a mild slowdown in global demand would do little harm.

Growth at home looks strong. Assuming China's economy cools without collapsing, Indonesia will have a voracious buyer for its commodities. Rising incomes have lifted buying power for the Southeast Asian country's rapidly growing middle class.

Inflation has receded over the past year, coming in at 3.65 percent year-on-year in January. If price pressures stay subdued, BI may still have more easing to do, said Eric Sugandi, an economist with Standard Chartered in Jakarta, who expects another rate cut in March.

"They won't hike -- not this year," Sugandi said, pointing out that the U.S. Federal Reserve looks likely to leave interest rates near zero until late 2014, which would make it hard for BI to tighten without attracting a destabilizing wave of capital.

"They need to cut more," he added. "The problem is the timing." Sugandi said the central bank may rely more heavily on open market operations or adjustments to banks' reserve requirements in order to fine-tune monetary policy.

Ikuti Whatsapp Channel Republika