Indonesia's central bank held its benchmark BI rate steady at 5.75 percent, as expected, but said it would not hesitate to adjust its policy stance and was closely monitoring inflationary pressures from rising inflation expectations linked to a possible government decision on oil-based fuels.
Bank Indonesia (BI), which last cut its rate by 25 basis points in 2012, said it would continue to absorb excess liquidity through longer-term instruments and would shortly publish a reference exchange rate for the rupiah in the domestic spot market to help stabilize the exchange rate.
Indonesia's government is considering cutting popular fuel subsidies that is helping widen its budget deficit. The government, which spends more on fuel subsidies than education or health care, will compensate some the poorest people in an attempt to soften the blow of higher fuel prices.
Indonesia's headline inflation rate eased in April to 5.57 percent from 5.9 percent, along with core inflation that fell to 4.12 percent in line with lower global commodity food prices, but added that "inflation expectations begin to rise driven by the uncertainty in fuel subsidy policy."
Bank Indonesia targets inflation of 4.5 percent, plus/minus one percentage point.
The central bank, whose governor is leaving later this month to be replaced by former finance minister Agus Martowardojo, said the pressure on the rupiah eased this month in line with higher capital inflows and there was only temporary pressure on the exchange rate following a revision earlier this month of the country's ratings outlook to stable from positive by Standard and Poor's.
The issue of fuel subsidies has made international investors jittery and put pressure on the rupiah's exchange rate. However, a global bond issue improved capital inflows with international reserves rising to 107.3 billion at the end of April, the equivalent of 5.8 months of imports and external debt service.
In the first quarter of 2013, Indonesia's Gross Domestic Product expanded by an annual 6.02 percent, lower than the central bank's forecast of 6.2 percent, and down from 6.11 percent in the fourth quarter of 2012.
Bank Indonesia said the slower growth rate was due to declining domestic demand while the recovery in export was still limited.
"Household consumption growth slowed in line with weakened purchasing power due to higher volatile foods inflation and rising inflation expectations related to uncertainty in fuel subsidy policy," the central bank said.
Growth in the second quarter is expected to be lower than previous forecast and around the first quarter rate, BI said, forecasting growth for 2013 in the lower range of 6.2-6.6 percent.
In 2012 Indonesia's economy expanded by 6.2 percent.