JAKARTA • Indonesia's inflation slowed to the weakest in almost seven years and fell below the central bank's target, bolstering the case for further interest rate cuts by Bank Indonesia (BI).

Consumer price gains eased to 2.79 per cent last month from a year earlier, compared with economists' 3.02 per cent estimate.

Prices fell 0.02 per cent in August from the previous month, the National Statistics Office said yesterday, adding that the annual rate was the lowest since December 2009.

"If you ask me now whether there is room for (monetary) easing, the room is more open. But whether it would be used or not, it is up to BI," Coordinating Minister for Economics Darmin Nasution said after the lower-than-expected data was announced.

Mr Nasution said BI had wanted to cut the benchmark rate "since last month" but then decided to delay to better introduce its new policy rate, the seven-day reverse repo rate, which stands at 5.25 per cent.

The authorities have set their 2016 inflation target at 3 per cent to 5 per cent and expect consumer price gains to end the year at around 3.5 per cent.

"Easing inflation - along with stability in both the current account deficit and exchange rate - has created policy space for rate cuts," said economist Ng Weiwen at Australia & New Zealand Banking Group (ANZ).

"The degree of easing will be dependent on the size of tax amnesty inflows."

ANZ expects the Indonesian central bank to lower its new benchmark rate by another 25 basis points to 5 per cent as soon as its September meeting, Mr Ng said.

Indonesia's 10-year bond yield slid four basis points to 7.07 per cent yesterday afternoon in Jakarta, set for the biggest daily gain in three weeks. Shares fell, with the Jakarta Composite Index extending its drop to 0.9 per cent and set for the lowest close since Aug 15.

Falling airfares, inter-city transport costs and cheaper food were the biggest factors driving the monthly drop in prices, said National Statistics Office deputy Sasmito Hadi Wibowo.

BLOOMBERG, REUTERS