[This story was first published at 5:58 p.m. on Monday, Mar. 2, 2015, and this update adds analyst comments, background]

Jakarta. Indonesia’s inflation eased more than expected in February as the lower fuel price helped prices decline across a wide range of goods, providing room for the central bank to further cut its key interest rate.

The consumer price index (CPI), a key measure of inflation, rose by 6.29 percent in February, down from 6.96 percent in January, data from the Central Statistics Agency (BPS) showed on Monday.

A Reuters poll of 13 economists expected annualized February inflation to slow to 6.70 percent.

BPS’s data also showed that core inflation, which excludes goods whose prices are administered by the government, such as fuel, and the volatile food prices, slowed to 4.96 percent from 4.99 percent.

“There is a wider range of decline in the prices of goods,” said Dian Ayu Yustina, an economist at Bank Danamon Indonesia.

“The biggest decline was in the price of chili peppers. The rising price of rice was overridden by declines in the prices of chili, chicken and eggs.”

On a monthly basis, prices fell by 0.36 percent in February.

Dian said the price fall was also seen in government-regulated prices such as transportation fare cuts following the lowering of subsidized fuel prices.

“The lower inflation outlook may provide a stronger reason for the central bank to cut the interest rate further, though they may have to be careful in deciding the timing of the cut as the currency is now at its weakest level since the 1998 crisis,” Dian said.

The financial markets responded differently.

The rupiah fell to 12,970 to the dollar as of 8:16 p.m. on Monday, weakening from 12,932 against the greenback on Friday. It has fallen 4.5 percent this year.

Meanwhile, the benchmark Jakarta Composite Index rose 0.51 percent to close at 5,477.83 points on Monday. It has gained 4.8 percent this year.

Bank Indonesia last month made a surprise move to cut its overnight benchmark interest rate by 25 basis points to 7.50 percent, on expectations that inflation would remain below 4 percent by the end of the year.

The central bank’s board of governors are scheduled to hold their next monthly policy rate meeting on March 17.

Bank Indonesia Governor Agus Martowardojo said on Monday that the central bank was optimistic that year-end inflation in 2015 would be lower than 4 percent.

Bank Indonesia’s official forecast for 2015 inflation is between 3 percent and 5 percent.

GlobeAsia

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Source: The Jakarta Globe