Indonesia's central bank held its benchmark BI rate steady at 6.50 percent but will use a broad array of policy instruments "to curb inflation and maintain a more sustainable balance of payments, as well as overall financial system stability."
Bank Indonesia (BI), which raised its rate in June and July, also said the risks of an economic downturn remains high but a further decline in the rupiah exchange rate, which should improve exports, along with weaker domestic demand, should reduce the current account deficit.
"Looking forward, Bank Indonesia expects the downward rupiah trend, which is still consistent with its fundamental conditions, to support efforts to expedite external rebalancing as well as to catalyze healthier economic growth," BI said.
The Indonesian rupiah has been depreciating from the beginning of the year with the decline accelerating since early May as major investors adjusted their portfolios in anticipation of a tapering of asset purchases by the U.S. Federal Reserves.
In July the rupiah slid a further 1.95 percent on average compared with June and since the start of the year it is down over 7 percent, quoted at 10.39 to the U.S. dollar earlier today.
The BI said it would undertake four different macroprudential and supervisory measures.
First, it would continue to absorb excess liquidity that tends to rise after Ramadan by issuing deposit certificates and "improve LDR-Reserve Requirements provisions to strengthen lending and prudent fund raising as well as secondary reserve requirements for banks to bolster liquidity management."
Secondly, the BI would continue to stabilize the rupiah exchange rate "in line with its economic fundamentals to maintain a more sustainable balance of payments."
Thirdly, the BI will conduct supervisory actions to control a still relatively high growth of credit in several banks and specific sectors, including those with high import contents. Fourthly, the BI will increase the supply of foreign exchange.
"BI strongly believes the policy mix will be sufficient to direct the 2014 inflation in line with its inflation target range of 4.5% +1%, as well as to buttress domestic economy adjustments toward a sound and balanced equilibrium," the bank said.
Indonesia's inflation rate soared in July to 8.61 percent from 5.9 percent in June, due to a "skyrocketing inflation of volatile foods, while inflation of administered prices as a direct result of subsidized fuel price hikes is in harmony with Bank Indonesia projections."
However, core inflation remained under control due to second-round effects that were less intense than when fuel prices have been raised in the past and the central bank expects inflation pressures to ease after Ramadan, the start of a new academic year and slower economic growth.
The central bank still expects headline inflation to return to its target range in 2014.
Global growth is forecast to be lower than projected, at 3.1 percent compared with 3.2 percent, due to slower growth in emerging markets, especially China and India.
Indonesia's economy expanded by an annual 5.8 percent in the second quarter from 6.03 percent in the first quarter and BI said Indonesia's exports remain insufficient to bolster economic growth as a result of persistently weak global economic demand.
"Lukewarm exports, coupled with weaker purchasing power due to rising inflation, have slowed household consumption and non-construction investment," the BI said.
Economic growth this year is forecast in the lower limits of a range of 5.8-6.2 percent and between 6.4-6.8 percent in 2014.
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