As a response to the surge in inflation due to increasing food and oil prices, the central bank decided Wednesday to maintain the interest rates at 8 percent.
Bank Indonesia governor Burhanuddin Abdullah said the central bank saw the economy facing various risks and challenges particularly in securing the inflation target.
On Feb. 4, the central bank announced it would raise its inflation range estimates from between four and six percent to six and 6.5 percent.
"BI will continue to monitor development in the last couple of weeks, particularly on the potential of a U.S. economic recession, the surge of commodity prices and the turbulence in the global capital market," Burhanuddin said.
A U.S.-led global economic slow down, he said, would have an impact on the country's economy, particularly on revenue from exports because there would be a decrease in demand from the U.S.
However, the decrease would likely be compensated by demands from more diversified market destinations, mainly in Asia, with its growing intra-regional trade.
With the challenges ahead, the board said in a statement that a strong policy coordination between the central bank as the monetary policy regulator and the government as the fiscal policy regulator were crucial.
It praised the government's recent price stabilization initiative.
BI deputy governor Budi Mulya said people's expectation of future inflation influenced their behavior in the market such as stock piling, which often became a significant contributing factor in pushing inflation.
In January, the country's inflation hit 1.77 percent, increasing from 1.1 percent in December 2007, because of the rise of prices in some of the nation's key commodities, including rice, wheat and soybeans.
Currently, BI's foreign exchange reserves amount to US$56 billion.
At the closing of the stock market Wednesday, the rupiah was trading at Rp 9,244 against the dollar.
In review of the country banking sector in 2007, the board concluded improvements had been made including the increase in total assets by 17.3 percent to Rp 1.99 trillion (about $214.9 million).
The industry saw a decline in gross non-performing loans (NPLs), from 6.98 percent to 4.64 percent, and net NPLs, from 3.63 percent to 1.94 percent, meaning the banks managed to settle their loans with the debtors.
The average loan-to-deposit (LDR) ratio of the country's banks also slightly increased from 66 percent in 2006 to 69.2 percent, the central bank said.
"Overall, the industry has improved and become more efficient. We expect that the trend will continue," Mulya said.
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