Indonesia keeps interest rate unchanged as inflation pressure mounts

Indonesian central bank on Tuesday held its benchmark interest rate steady at 7.5 percent despite slowing economic growth, as inflation accelerated ahead of fasting month and rupiah kept weakening against the U.S. dollars.

The governor board meeting decided to keep the basic rate at 7. 5 percent after it unexpectedly cut the rate by 25 basis points in February.

Inflationary pressure ahead of the fasting month of Ramadhan, which falls at middle of next month and during which the demand of foods and clothes regularly increases in the world's biggest Muslim country, will add to the already high inflation in country.

Growth in consumer prices index accelerated in April to 6.79 percent from 6.38 percent in March, according to the national statistic bureau.

Meanwhile, weakening rupiah against the U.S. dollar remains a concern for the central bank, which struggles to narrow current account deficit gap.

"This is in line with tight monetary policy, so that inflation will be at the target of 3 to 5 percent in 2015 and 2016, and current account deficit will be at 2.3 to 3 percent of GDP at mid term," Agus Martowardojo, governor of the bank said at the bank headquarters.

The bank has also struggled to guard rupiah against the U.S. dollar amid the concerns that the U.S. Federal Reserve will raise interest rate this year which may draw capital inflow from Indonesia, which still has big current account deficit gap.

Indonesia current account deficit reached 1.8 percent of gross domestic product (GDP) in the first quarter of 2015, slightly higher than the central bank's estimation of 1.6 percent of GDP.

"There is a concern (of the lender) that people are reluctant to keep rupiah should its value be persistently eroded by inflation. The decision is expected to add supply of U.S. dollars at the market and strengthen rupiah," Farial Anwar, analyst from the Currency Management Group told Xinhua by phone after the central bank announcement.

The analyst projected the central bank to keep its tight monetary policy by this year, anticipating possible capital outflows ahead of the U.S. Fed interest rate hike policy.

"There is wariness that America will raise interest rate. If we cut rate, the central bank may be worry that people will not be interested to hold rupiah," said Anwar.

The central bank also kept the lending rate facility at 8 percent and deposit facility rate at 5.5 percent, said Martowardojo.

Indonesia's economy expanded at slowest pace since 2009 to 4.71 percent in the first quarter, due to lower government spending and demand.

The bank expects the growth will accelerate as the government spending rises amid increasing investment. Endi