Excerpt from the statement by the Bank Indonesia:
The current policy rate is considered consistent with inflation target range of 4.5%±1% in 2013 and 2014. Although CPI in April 2013 recorded a deflation, Bank Indonesia will closely monitor the risk of inflationary pressures emanating from rising inflation expectations in view of the possibility of a Government policy decision related to oil-based fuels. In that regard, Bank Indonesia will continue strengthening monetary operations by absorbing more excess liquidity using its longer-term instruments. This policy is also intended to support exchange rate stabilization towards the rate consistent with its fundamental. This policy will be supported by further measures to deepen financial markets, particularly the foreign exchange market, such as by publishing a reference to rupiah exchange rate in the domestic spot market in the near future. Going Forward, Bank Indonesia will be vigilant on a number of risks that may put pressures on both inflation as well as exchange rate, and will not hesitate to act to adjust monetary policy if needed. In addition, policy coordination with the Government will be strengthened with focus on efforts to minimize inflationary pressure and to manage current account deficit.
The Indonesian economy in the Q1-2013 grew 6.02%, slower than the previous quarter of 6.11%. The Gross Domestic Product (GDP) growth was lower than the earlier prediction of Bank Indonesia at 6.2%. The slow growth of the economy stems from declining domestic demand, amid the export recovery still limited. Household consumption growth slowed in line with weakened purchasing power due to higher volatile foods inflation and rising inflation expectations related to uncertainty in fuel subsidy policy. In addition, government consumption slowed at the beginning of the year in line with low budget absorption, especially in goods expenditure. On the other side, investment, particularly non-construction, has a tendency to slow down affected by moderate demand domestically and internationally. In line with slowing down in investment and consumption, imports contracted. With that condition, economic growth in the Q2-2013 is expected to be lower than previously forecasted and will be at a level that is not much different from Q1-2013. For the whole year of 2013, Indonesia’s economic growth will reach toward the lower band of 6.2%-6.6%.
From the external side, the external balance has improved as expected. Current account deficit in the Q1-2013 went down to 2.4% of GDP from 3.5% of GDP in the previous quarter. Improvement in the current account deficit was associated with better trade balance as imports fell sharply, especially on consumer goods, while some non oil and gas exports commodities continue to post positive growth.
Rupiah depreciation pressure has moderated in April 2013 with less intensity in line with an increase on capital inflows. S&P’s outlook cut, from positive to stable, has only affect the Rupiah exchange rates temporarily. Indonesia outlook revised by S & P from positive to stable has only temporary impact on Rupiah.