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Jakarta - Indonesia's central bank left its policy rate unchanged on Thursday saying inflation remained under control, while slashing its 2014 economic growth outlook for 2014 as exports struggled.
Bank Indonesia kept rates unchanged for the sixth straight meeting, which was widely anticipated, but warned the current-account gap would widen in the coming quarters as exports contract from the effects of a mineral export ban.
The ban along with successive hikes in interest rates to shrink the current-account deficit caused growth in Southeast Asia's largest economy to drop to its weakest in nearly four years in the first quarter.
The central bank's aggressive tightening steps last year, however, halted a widening in the current-account gap, dampened inflationary pressures and returned confidence to the rupiah.
Analysts say improved fundamentals will likely put the economy on sufficiently solid ground to defend against capital flows as the Federal Reserve winds down stimulus and ahead of an anticipated rise in US rates.
All 15 analysts in a Reuters poll had unanimously expected the benchmark reference rate to be left unchanged at 7.50 percent, as pressures had eased. The rupiah is now Asia's best performing currency, up 4.9 percent against the dollar so far this year.
Bank Indonesia also kept the deposit facility rate (FASBI) and lending facility rate at 5.75% and 7.50%, respectively.
The recovery in fundamentals suggests BI will likely put off further policy tightening, and give more time to the series of rate hikes implemented last year to filter through the economy.
The central bank had kept the benchmark rate unchanged since December, after raising them a total of 175 basis points between June and November to calm anxious investors and stem a sell-off in Indonesian assets.
"This decision is affirming BI's stances. The bank will watch the external factors and fiscal policy of the new government at the end of the year. But for now, they are watching the current-account deficit," said David Sumual, economist at Bank Central Asia in Jakarta.
The Philippine central bank kept rates unchanged but raised banks' reserve requirements. Malaysia's central bank is also expected to keep rates on hold at its meeting later on Thursday.
Indonesia's current-account deficit narrowed slightly in the first quarter to 2.06% of GDP but will increase further in the second and third quarters because of seasonal factors, the central bank said. That was marginally lower than the revised 2.12% deficit of the previous quarter but was around Bank Indonesia's estimate of around 2%.
The current account - the widest measure of the flow of goods, services and money in and out of the country - is estimated at below 3% for the full year, down from 3.3% in 2013.
The government has said its priority is to shrink the current-account deficit even at the expense of growth.
The central bank cut full-year gross domestic product growth to 5.1-5.5% from its previous estimate of 5.5-5.9% due to a sharp drop in exports.
The export growth outlook was slashed to 1.5-1.9% this year from a previous forecast of 8.1-8.5%, due to a ban on mineral ore shipments and declining commodity prices.
Improvements in Indonesia's economic fundamentals remain volatile amid patchy global demand while domestic consumption is strong. There is also the possibility of fuel prices increases next year adding to inflationary pressures.
Domestic consumption, which contributes more than 50% of the economy, stayed resilient in the first quarter on pre-election spending in April and July.
