Indonesia's central bank held its benchmark BI rate steady at 7.50 percent, along with its other main rates, saying the policy stance was consistent with reducing inflation to the bank's target for 2014 and 2015 as well as lowering the current account deficit "to a more healthy level."
Bank Indonesia (BI) raised its rate by 175 basis points last year in response to inflationary pressures from a reduction in fuel subsidies and a decline in the rupiah's exchange rate. But this year it has maintained rates, confident that inflation will ease.
But the BI added that "it will keep a close watch on inflation risks, including the potential for pressure adjustments in administered prices and the potential increase in food prices due to the impacts of El Nino caused drought in some areas."
Indonesia's inflation rate eased to 7.25 percent in April from 7.32 percent in March, the eight consecutive month of declining inflation after rising to 8.79 percent in August last year. The BI targets 2014 inflation of 4.5 percent, plus/minus one percentage point, and 2015 inflation of 4.0 percent, also around a one percentage point tolerance band.
The BI said inflation remains in a downward trend and the current account is also shrinking, while domestic demand is well managed though economic growth in the first quarter fell, and was lower than expected, due to a drop in exports, especially commodities mining.
Indonesia's Gross Domestic Product expanded by only 0.95 percent in the first quarter of this year from the previous quarter for annual growth of 5.21 percent, down from 5.72 percent in the fourth quarter, slower than the BI had expected.
It said the lower growth was due to a decline in real exports, such as coal and mineral concentrates, partly due to weaker demand from China and declining prices, as well as the impact of the government's temporary ban on raw minerals.
Government consumption also contributed to slower growth, but BI said household consumption and investments were still growth enough to sustain economic growth in the first quarter.
Indonesia's balance of payments also improved in the first quarter, helping reduce the current account deficit to an estimated 2.06 percent of GDP in the first quarter, down from a fourth quarter 2013 deficit of 2.12 percent, BI said.
Inflows of foreign capital in the form of direct investment and portfolio investment to a record helped boost sentiment and foreign exchange reserves rose to US$ 105.6 billion, the equivalent of 6.1 months of imports, from $102.6 billion end-March.
The current account deficit, however, is expected to increase in the second and third quarter due to seasonal patterns, but for the full year it is expected to remain below 3.0 percent of GDP.
Improving economic fundamentals is supporting the rupiah's exchange rate trend, with its exchange rate up 7.13 percent end the end of the first quarter from late 2013 though it was slightly lower in April, reflecting a "more hawkish" statement from the U.S. Federal Reserve, concerns over the slowdown in China and the escalation of geopolitical tensions in the Ukraine-Russian border.
At the end of April the rupiah was trading at 11,562 to the U.S. dollar, down 1.74 percent from end-March for an average rate of 11.439 to the dollar in April, down 0.17 percent. Today the rupiah was quoted at 11,520.