Indonesia's central bank raised its benchmark BI rate by a further 25 basis points to 7.50 percent to rein in inflation and reduce the current account deficit.
Bank Indonesia (BI) has now raised its policy rate five times this year by a total of 175 basis points. It also raised the lending rate to 7.50 percent and the deposit rate to 5.75 percent.
"This policy was taken in light of the persistently large current account deficit amid widespread global uncertainty" to ensure that the current account deficit is reduced to what BI described as a more sound level and that inflation in 2014 returns to the bank's target of around 4.5 percent, plus/minus one percentage point.
Indonesia's headline inflation rate eased to 8.32 percent in October from 8.4 percent in September, "reinforcing indications that monthly inflation is returning to normal," the bank said, with core inflation stable at 4.73 percent on stable external markets and lower international food prices.
BI's rate increase comes after its senior deputy governor, Mirza Adityaswara, on Monday said that the central bank would stick to its tight bias due to continued high imports while it was comfortable with the exchange rate.
The impact of the rupiah's deprecation on inflation in October was relatively negligible, BI said.
Based on lower inflationary pressures, the bank expects an average inflation rate in 2013 of slightly below 9.0 percent and for inflation to hit the bank's target range in 2014. In 2012 Indonesia's inflation rate was 4.3 percent.
BI projected that Indonesia's current account deficit would shrink to US$ 8.4 billion in the third quarter from $9.85 billion in the second quarter, with the surplus in the capital account eroded by evaporating inflows of foreign portfolio investment due to uncertainty in global financial markets. Nevertheless, foreign direct investment had surged.
Indonesia's foreign exchange reserves rose $1.3 billion to $97.0 billion in October, the equivalent of 5.3 months of imports and serving of external debt, a level the BI described as adequate.
The central bank said it would continue to "monitor the global economy while uncertainty remains pervasive," noting the shift in the international economic landscape as developing countries slow down and advanced economies start to strengthen along with an end to the cycle of high commodity prices that "could undermine efforts to recover the domestic economy."
"Bank Indonesia will monitor a number of risks in the global and domestic economies as well as optimize their monetary and macro prudential policy mix," the bank said, adding it would continue to strengthen its policy coordination with the government to control inflation and the current account.
The central bank said the global economy picked up during October on the back of positive sentiment in financial markets due to delayed discussions of the U.S. debt ceiling and the Federal Reserve's delayed tapering of its asset purchases.
Indonesia's economy slowed, as expected, in the third quarter, with Gross Domestic Product expanding by an annual 5.62 percent, down from 5.81 percent in the previous quarter, due to weak construction investment and tepid non-construction investment.
But the BI said this slowdown was linked to the government and the central bank's efforts to "bring economic growth to a more balanced and sound level."
For the year, the BI still projects growth of 5.5-5.9 percent in 2013, rising to 5.8-6.2 percent in 2014. In 2012 the economy grew by 6.2 percent.
The exchange rate of the rupiah was stable in October, falling by 0.14 percent during the month to an average rate of 11,343 to the U.S. dollar, helped by improved global financial markets, dampened demand for oil and gas imports, and lower inflation expectations that led to an influx of foreign capital to domestic financial instruments.
"Bank Indonesia will continue to maintain rupiah exchange rate stability in line with fundamentals," said the BI, which has seen the rupiah fall by 16 percent this year against the U.S. dollar as global investors have withdrawn some funds in anticipation of stronger growth in advanced economies.