UPDATE 2-Indonesia holds rates as current-account deficit narrows sharply
* Policy rate kept at 7.50 pct, as expected in a Reuters poll
* Current-account deficit at 1.98 of GDP in Q4 - c.bank
* Bank Indonesia says to stay vigilant to inflation risks (Adds analyst comments)
By Adriana Nina Kusuma and Rieka Rahadiana
JAKARTA, Feb 13 (Reuters) - Indonesia's central bank kept its benchmark rate unchanged on Thursday, as expected, and said the troubling current-account deficit narrowed last quarter to its smallest in 1-1/2 years, leaving it less vulnerable to emerging market volatility.
Southeast Asia's largest country is the only one of the "Fragile Five" major emerging economies not to have raised rates this year to fend off the recent emerging markets rout. India, Turkey, Brazil and South Africa raised rates last month to bolster their economies.
Some economists said the central bank's tightening cycle may be over.
A slowdown in imports, higher exports and moderating inflation all gave Bank Indonesia a chance to pause for the third consecutive month, leaving the reference rate at 7.50 percent.
It still sounded a cautious note over inflation and said it was not easing back on a tight monetary policy that began last June to guard against capital outflows from U.S. tapering and risks from this year's much-criticised mineral export ban that could pressure the country's trade account.
"The policy remains consistent with the tight monetary policy stance to direct inflation to its target in 2014 and 2015, as well as easing the current-account deficit towards a healthier level," Governor Agus Martowardojo told reporters.
Indonesia lifted its reference rate by a total of 175 basis points between June and November, after offshore investors dumped Indonesian assets and battered the rupiah which lost more than 20 percent in 2013.
In a sign of how attitudes have changed, the rupiah has become the best performer among Asia's emerging market currencies on Thursday. Last year, it was its worst.
CURRENT-ACCOUNT GAP NARROWS
Martowardojo said the current-account deficit in the fourth quarter had narrowed sharply to 1.98 percent of GDP. That is half what it was six months ago, when it stood at a record 4.4 percent of GDP, dragging down the rupiah. The deficit is now the smallest since Q2 of 2012.
The G20 economy is among the most vulnerable countries to the risk of outflows due to its current-account deficit.
But a Reuters poll showed sentiment in the rupiah had risen to its highest in 1-1/2 years, further highlighting that the central bank's actions have helped differentiate it from the rest of the "Fragile Five".
The vast majority of analysts in a Reuters poll had predicted Bank Indonesia would hold its benchmark rate steady at 7.50 percent. It also kept the deposit facility rate, or FASBI and the lending facility rate unchanged at 5.50 percent and 7.50 percent, respectively.
Some analysts expect further rate hikes by the central bank to fund the current-account deficit as risks start building up due to adverse weather, elections and the mineral export ban.
But others said the rate hike period may be at an end.
"Provided there are no further sharp and sudden falls in the rupiah, we believe the tightening cycle ... is now over," said Capital Economic Asia economist Gareth Leather.
Both the rupiah and Indonesia's main index were barely changed after the announcement.
Encouraging balance of payments data should give Bank Indonesia room to keep its policy rate unchanged in the coming months, whilst awaiting the effect of its mineral export ban on the trade balance in the first quarter of the year.
Though domestic consumption has cooled, investors question the effectiveness of the central bank's massive rate hikes on restraining imports.
Economic growth in 2013 was the slowest in four years, but the share of domestic consumption in the overall economy rose to 55.82 percent from 54.64 percent previously. (Additional reporting by Nilufar Rizki; Editing by Jonathan Thatcher and Jacqueline Wong)