Is Bank of Indonesia's surprise rate cut worrisome?

The unexpected 25bps rate cut raises alarms that inflationary risks are being underestimated, says OCBC.

In explaining its policy move, Bank of Indonesia has said that it will prioritize growth over inflation, which the brokerage firm believes will send market players running for risk cover.

Here's more from OCBC:

BI made a surprise 25bps rate cut to its main policy rate on Thursday, stating the need to continue supporting growth, which is now estimated to come in near the bottom of the 6.3-6.7% range for 2012. Interestingly, BI also noted that going forward it will shift its focus towards growth rather than inflation, which is estimated to continue declining unless the government goes ahead with its fuel subsidy changes.

Several other important things prop up from the latest policy statement but perhaps none as interesting as this last statement, as it suggests that either the BI is extremely confident of its inflation forecast for the year or a signal that the central bank may drift away from its original mandate to keep prices stable. In any case, the rather apparent dovish tendency that is being showcased by the BI make it increasingly likely that market participants may turn cautious again with regards to monetary policy risks in Indonesia. In fact, at the onset of BI’s latest monetary loosening cycle late last year, both the IMF and S&P have already cautioned over the longer-term inflationary risks of what was then seen as an aggressive move by the BI.