* Q1 growth slower than Q4 2010's 6.9 pct
* Consumption, transport, communications drive Q1 growth
* Inflation slowed for 3rd month in April, cbank seen on hold (Updates with details)
By Neil Chatterjee and Aditya Suharmoko
JAKARTA, May 5 (Reuters) - Indonesia's economy, the biggest in Southeast Asia, expanded a strong 6.5 percent in the first quarter from a year ago, in line with expectations and driven by investment and emerging middle class consumers.
The pace of growth in gross domestic product slowed from the previous quarter, when it was its fastest in at least six years.
The moderation should give the central bank room to leave interest rates on hold again when it meets next week after policymakers have allowed the Indonesian currency, the rupiah, to rise 5 percent in 2011 to a 7-year high to keep a lid on inflation.
Annual inflation slowed to a six-month low in April, though most analysts see core inflation picking up further, which may prompt Bank Indonesia to raise the benchmark rate in coming months from 6.75 percent currently.
"There is little sign here that the economy is becoming overheated... The central bank will be in no hurry to move again after CPI fell for three months running," said George Worthington, economist at IFR Markets, a unit of Thomson Reuters, in Sydney.
The economy appeared to be on track to meet government and analyst forecasts for a 6.4 percent expansion in 2011, the third-highest in Asia after China and India. Solid growth and other factors have helped push stocks to a record high this week and attract investors to a global bond issue.
"The vital signs for the Indonesian economy are its strongest in the last decade and the fundamentals are improving," said Finance Minister Agus Martowardojo at an Asian Development Bank forum in Hanoi on Thursday.
The minister said he is confident inflation can be kept within the government's target this year and is comfortable that exporters can cope with the stronger rupiah .
Indonesia's central bank has said it maintains a tightening stance to manage inflation, after a surprise 25 basis points rate rise in February to calm worried markets, though it is also focused on spurring growth. The rate rise was its only move since slashing rates during the financial crisis, and analysts see up to 75 bps of further tightening this year.
Foreign portfolio investors, who offloaded Indonesian assets earlier this year on concerns about the central bank's ability to control inflation, have resumed buying, with foreign bond ownership at record levels. Indonesia's credit rating is one notch below a coveted investment grade that would put it on a par with BRIC nations such as China.
RISING INCOMES
The statistics bureau said growth, which was 6.9 percent in the fourth quarter of 2010, was led in the first quarter by the telecommunications and transport sectors. These grew 13.8 percent, while trade, hotel and restaurants rose 7.9 percent.
Indonesia's main vehicle seller Astra saw first quarter profits jump 43 percent, reflecting car sales that were up around 30 percent in a buoyant consumer market that has attracted investment interest this year from Japan's Daihatsu and China's BYD .
Total investment grew 27 percent in the first quarter from a year ago. China, seeking resources from the world's largest thermal coal and palm oil exporter, said last week it will provide Indonesia with $9 billion in loans for infrastructure.
While commuters in the capital are used to waiting, stuck in
traffic during tropical downpours, queues for Unilever's
"Household consumption, as the main foundation of Indonesia's economy, is good. We have just got out from a global recession, and this means that investment is playing a key role again, and can give a multiplier effect to Indonesia's economy," said Eric Sugandi, economist at Standard Chartered in Jakarta.
Unemployment in February dropped to 8.1 million people or 6.8 percent of Indonesia's labour force, from 7.4 percent a year ago, the statistics bureau said.
Improvements in commodity-driven infrastructure outside the main island of Java are giving a boost to transport, construction, and banks. Top lender Mandiri saw first quarter profit surge 89 percent, as overall growth in the economy's financial and real estate sectors quickened to 7.3 percent.
Indonesia aims to reach annual growth of over 7 percent by 2014, but poor infrastructure, from bad roads to electricity blackouts, remains an obstacle and the government is seeking to overhaul it with $100 billion of private investment. (Additional reporting by Adriana Nina Kusuma in JAKARTA and John Ruwitch in HANOI; Writing by Neil Chatterjee; Editing by Ramya Venugopal)