Indonesia holds rate steady but wary of risks to inflation

    Indonesia's central bank held its BI rate steady at 5.75 percent, but said it was "wary of a number of risks to inflation and would adjust its monetary policy response as needed," including absorbing excess liquidity and strengthen its coordination with the government to reduce the current account deficit and minimize inflationary pressures from volatile food prices through changes to import policy.
    Bank Indonesia (BI), which cut rates by 25 basis points in 2012, trimmed its forecast for economic growth in 2013 to a range of 6.2-6.6 percent from a previous forecast of 6.3-6.8 percent and said second quarter growth this year is forecast to be steady from an estimated 6.2 percent in the first quarter.
    Domestic demand is continuing to grow quite strongly, the BI said, with robust private consumption supported by improved purchasing power and consumer confidence.
   Non-construction investment has slowed but "export volume has increased in line with the economic recovery in some major trading partners, particularly China," the BI said, adding growth is also supported by high growth throughout the region.
    For 2014, economic growth is expected to rise to 6.6-7.0 percent, slightly down from an earlier forecast 6.7-7.2 percent, as domestic demand remains strong and global growth strengthens, the BI said.
    Indonesia's Gross Domestic Product contracted by 1.45 percent in the fourth quarter from the third for annual growth of 6.1 percent, slightly down from the third quarter rate of 6.17 percent.
     The inflation rate jumped to 5.9 percent in March from 5.3 percent in February, the highest in 22 months,  and above the BI's target of 4.5 percent, plus/minus one percentage point.
    But core inflation was stable at 4.2 percent and and the BI expects inflationary pressures to ease due to government measures to address food supply problems and the upcoming harvest season.
    There is still downward pressure on Indonesia's rupiah, though it has been more moderate as the BI has strengthened its foreign exchange intervention, used term deposits and deepened the FX market.
    In the first quarter, the rupiah weakened by 0.7 percent against the U.S. dollar to an average rate of 9.68 per dollar and the bank expects moderate depreciation pressure in the second quarter.
    Last week the BI's outgoing governor Darmin Nasution told reporters that an increase in the policy rate would be inevitable if inflationary pressures continued.
    Nasution's term ends May 23 and he will be replaced by Finance Minister Agus Martowardojo.
   
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