Bank Indonesia begins its 2-day monetary policy meeting on Wednesday. The 2-day monthly meeting is a new format that the central bank adopts starting this month. There is definitely plenty to ponder this month, given how risk aversion has been rather overwhelming so far in 2016. Concerns over growth prospect in the region have escalated following the turmoil in China markets last week. Most Asian currencies, including the rupiah, have been under pressure against the US dollar. 

"Inflation has moderated more markedly than our expectations. In particular, core inflation has fallen below 4% (YoY), lowest in 5 years. While it may well be a one-off, it still suggests that inflationary pressures may not be as high as what we have projected for this year", says DBS Group Research.

If CPI and core inflation were to remain circa 5% and 4% respectively this year, there is arguably room for BI to cut interest rates. As it is, real interest rates are already the highest in the region. Chances of a rate cut are probably higher now compared to last month. 

"We wonder if it is necessary to cut at all though. Official projections, including that of the central bank's, have already pointed to a stronger GDP growth in 2016. As noted in our latest quarterly, we reckon that GDP growth might have bottomed out", added DBS Group Research.

A slightly faster investment growth this year is likely to lift overall GDP growth above 5%. And this is based on the projection of steady BI rate at 7.5% throughout the year. There is no urgent need to cut rates. A stable rupiah is arguably more important for stronger GDP growth. At a time when talks of a currency war are rife in the markets, cutting interest rate may send the wrong signal. That BI has been active managing volatility of the rupiah for quite some time makes it hard to digest why the central bank would want to cut rates at this juncture.