Indonesia's central bank maintained its benchmark BI rate at 7.50 percent, as expected, but said it remained vigilant of rising inflation expectations from the government's planned increase in fuel prices and would adopt a number of policies, including strengthening coordination with central and local governments, to ensure the impact on inflation remained "controlled and temporary."
Bank Indonesia (BI), which has maintained rates since November 2013, also said inflation remains under control and is continuing to follow a downward trend, bolstering the prospect of meeting the 2014 inflation target of 4.5 percent, plus/minus one percentage pony.
Indonesia's headline inflation rate rose to 4.83 percent in October from 4.53 percent in September while core inflation eased to 4.02 percent from 4.04 percent.
Indonesia's government plans to raise prices of subsidized gasoline and diesel this month to help reduce the current account deficit.
Last year the BI raised rates in response to the government's planned reduction in fuel subsidies at the same time that the country, along with other emerging markets, experienced a sudden surge in capital outflows, and thus downward currency pressures, due to expectations that the U.S. Federal Reserve would start to trim its asset purchases.
The central bank said domestic economic growth has been decelerating in line with weak global demand, with investment activity remains weak and exports have contracted. But growth in Eastern Indonesia has accelerated as mineral exports resumed and growth in Java remains high as manufacturing exports have continued to expand.
For 2014, economic growth in Indonesia is still projected in the lower end of a 5.1-5.5 percent range before rising to 5.4-5.8 percent in 2015.
Indonesia's current account deficit narrowed to US$ 6.836 billion in the third quarter from $8.689 billion in the second quarter, mainly due to a significant surplus in non-oil and gas balance and positive manufacturing exports and recommenced exports of unrefined mineral exports.
BI said it expects the current account deficit to continue to improve in line with robust manufacturing and mineral exports as well as controlled oil and gas imports.
In the third quarter, Indonesia's foreign exchange reserves rose to $112.0 billion, equivalent to 6.6 months of imports.
Bank Indonesia issued the following statement:
The Board of Governors of Bank Indonesia, convening on 13th November 2014, decided to hold the BI rate at 7.50%, with the Lending Facility and Deposit Facility rates to remain at 7.50% and 5.75% respectively. Such policy is consistent with efforts to control inflation towards its target corridor of 4.5±1% in 2014 and 4.0±1% in 2015, as well as to reduce the current account deficit to a more sustainable level. Bank Indonesia confirms that the economic stabilization policy that has been adopted is able to safeguard macroeconomic and financial system stability as well as to support a more balanced economic adjustment process. Such conditions are confirmed by a declining current account deficit and managed domestic demand. Nonetheless, Bank Indonesia remains vigilant of indications on rising inflation expectations linked to fuel subsidy policy planned by the government. To that end, Bank Indonesia will continuously strengthen its monetary and macroprudential policy mix to safeguard macroeconomic and financial system stability as well as strengthening the domestic economic structure. Furthermore, policy coordination between Bank Indonesia and the Government will be intensified in terms of controlling inflation and reducing the current account deficit to ensure measured economic rebalancing and to bolster sustainable economic growth.