Indonesia's central bank maintained its benchmark BI rate at 7.75 percent, as expected, and voiced confidence that inflation would remain under control and within its target corridor this year, helped by stable core inflation and lower oil prices.
Bank Indonesia (BI), which raised its rate by 25 basis points in November in response to President Joko Widodo's cut in fuel subsidies, will target inflation of 4.0 percent, plus/minus one percentage point, in 2015, down from 2014's target of 4.5 percent, also plus/minus one percentage point.
Indonesia's consumer price inflation rate rose to 8.36 percent in December, up from 6.23 percent in November and 8.38 percent in December 2014 due to the fuel price hike and domestic price shocks.
Nevertheless, BI considered inflation to have remained under control in with core inflation up to 4.93 percent in December from 4.21 percent in November.
Indonesia's economic growth is expected to strengthen this year, with growth forecast from 5.4 to 5.8 percent, up from 5.1 percent in 2014, which was down from 5.8 percent in 2013.
BI said growth this year will be helped by expanding government consumption and investment, including infrastructure investment, on top of strong household consumption. Part of the reason for the cut in fuel subsidies was to allow the government to channel funds into productive investments, and help it reduce its budget and the country's current account deficit.
Indonesia's foreign exchange reserves at the end of December rose to US$111.9 billion, up from $111.1 billion end-November, and BI expects the current account deficit to improve further, though the government's infrastructure projects "could potentially stifle improvements in the current account deficit," the BI said.
But ongoing structural reforms should also help attract capital inflows in the form of foreign direct and portfolio investment, offsetting the current account deficit.
Indonesia's current account deficit narrowed to $6.835.9 billion in the third quarter of 2014 from $8.689 billion in the second quarter. Its Gross Domestic Product expanded by 2.96 percent in the third quarter from the second quarter for annual growth of 5.01 percent, down from 5.12 percent.