Indonesia's central bank maintained its benchmark BI rate at 7.50 percent and said it was "confident" that it would meet its inflation target of 4.0 percent, plus/minus 1 percentage point, in 2015, and would maintain a stable rupiah exchange rate that is in line with its fundamental value.
Bank Indonesia (BI), which cut its rate by 25 basis points in February and expected to maintain rates today, said the recent pressure on the rupiah "stemmed from concerns over domestic economic moderation," along with overall strength of the dollar against nearly all currencies, but concern over growth were "allayed by a stronger outlook rating for Indonesia issued by S&P."
The rupiah has depreciated against the U.S. dollar since April 2014 and was trading around 13,308 to the dollar today, down 6.5 percent this year and 8.6 percent since the start of 2014. In May, the BI said the rupiah had depreciated by an average of 1.5 percent from April, with the European Central Bank's quantitative easing and Greek negotiations exacerbating the dollar's rise.
Indonesia's inflationary pressures escalated in May due to food price shocks, the BI said, with inflation rising to 7.15 percent from 6.79 percent. Inflation was boosted by bad weather reducing food supply while electricity and airfreight tariffs also rose. However, BI noted that core inflation was under control, with the rate steady at 5.04 percent in the last three months, due to a moderation of the domestic economy and anchored inflation expectations.
Indonesia's Gross Domestic Product shrank by 0.18 percent in the first quarter from the fourth quarter, the second quarter in a row of contraction, with GDP on an annual basis up by 4.71 percent -the lowest rate in more than five years - down from 5.01 percent in the previous quarter.
BI expects growth to remain limited in the second quarter due to weak global growth, low commodity prices, limited growth of investments and slower-than-expected infrastructure spending.
But growth is expected to strengthen as consumption is expected to improve and government investments "surge" in line with the implementation of infrastructure projects.
For 2015, BI forecast growth of 5.0 to 5.4 percent, in line with its governor who in May predicted growth of 5.1 percent, below the previous forecast of 5.4 to 5.8 percent. On May 28 Governor Agus Martowardojo also forecast 5.4-5.8 percent growth in 2016.
BI added that higher government spending will help improve the investment climate and thus have a "crucial role in boosting economic growth in 2015."
Bank Indonesia issued the following statement: