Indonesia's headline inflation rate fell further to 7.32 percent in March, the seventh month in a row with declining inflation and a lower-than-average rate than in the last six years, after jumping in July last year and hitting a 2013-high of 8.79 percent in August due to a reduction in government subsidies.
Inflation remained under upward pressure last year due to the impact of the rupiah's depreciation from an outflow of capital from emerging markets and higher food prices from flooding.
Bank Indonesia (BI) responded aggressively to last year's inflationary pressures by raising its BI rate by a sharp 175 basis points and has maintained the rate for the last five months.
The BI said inflationary pressures are still declining due to lower core inflation, the appreciation of the exchange rate, moderation of domestic demand and inflation expectations.
"Going forward, Bank Indonesia will keep close watch on a number of risks that could undermine the achievement of the inflation target, such as the adjustment of administered prices, and the potential increase in food prices due to drought in some areas, including the indication of the possibility of a weak El Nino intensity in August 2014," the BI said.
BI said its current policy stance was consistent with its efforts to steer inflation toward its 2014 target of 4.5 percent, plus/minus one percentage point, and its 2015 target of 4.0 percent, plus/minus one percentage point, as well as lowering the current account deficit.
Indonesia's trade balance recorded a surplus of US$ 785.3 million in February after a deficit of $430.6 million the previous month due to lower non-oil imports in line with lower domestic demand and an improvement in non-oil exports, especially manufacturing exports to advanced economies.
Indonesia's balance of payments was also helped by continued capital inflows in March, with first quarter foreign portfolio inflows reaching $5.8 billion, the BI said, helping boost foreign exchange reserves to $102.6 billion end-March, the equivalent of 5.7 months of imports of goods and foreign debt repayments.
The BI expects a continued improvement in its external sector and reiterated that it expects the current account deficit to decline to below 3.0 percent of Gross Domestic Product in 2014. In 2013 Indonesia's current account deficit was estimated at 3.2 percent of GDP, up from 2.7 percent in 2012.
Manufacturing exports to advanced economies are expected to continue to support Indonesia's economy this year while private investment was still limited in the first quarter of this year but should rise in the second half.
But there are some indications that household consumption improved in the first quarter, partly driven by spending in connection with the election and overall the BI said it still expects 2014 economic growth to reach 5.5 to 5.9 percent. Last month the BI cut its 2014 growth forecast to 5.5-5.9 percent from a previous forecast of the lower end of 5.8-6.2 percent.
In the fourth quarter of 2013, Indonesia's GDP contracted by 1.42 percent from the third quarter for annual growth of 5.723 percent, up from 5.62 percent.
Helped by an improvement in Indonesia's current account and economy, the rupiah has performed strongly this year after tumbling almost 21 percent in 2013.
In March the rupiah rose 2.19 percent against the U.S. dollar from the end of February, closing the month at 11,360 to the dollar, for a gain of 7.13 percent from the end of 2013. Earlier today it was quoted at 11,300 to the dollar.