Headline inflation rose at the slowest pace in more than two years in September, drawing closer to the bottom of the central bank’s target range for inflation to read at 2.88% y/y, while core consumer inflation, which strips out more volatile and state-controlled prices, came in at 2.82% y/y.

The latest reading saw the headline inflation closer to the 2.5% floor of Bank Indonesia’s target range while the ceiling is at 4.5%. Though inflation is in check, the focus will be on the rupiah’s stability. Hawkish rhetoric from the central bank for “front-loaded and pre-emptive action” has helped limit the initial panic of emerging market contagion. Room for rate hike remains, as much depends on the stability of rupiah and the stability of inflation.

• Consumer prices rose at the slowest pace in more than two years in September, drawing closer to the bottom of the central bank’s target range for inflation. Headline inflation rose 2.88% y/y from 3.2% y/y in August.

• Meanwhile, core consumer inflation, which strips out more volatile and state-controlled prices, came in at 2.82% y/y from 2.9% y/y in August.

• The latest inflation reading saw the headline inflation closer to the 2.5% floor of Bank Indonesia’s target, while the ceiling is at 4.5%. Though inflation is in check, the focus will be on the rupiah’s stability. Hawkish rhetoric from the central bank for “front-loaded and pre-emptive action” has helped limit the initial panic of emerging market contagion.

• With the central bank having raised interest rates by 150 basis points in 2018, further monetary tightening remains in the cards should volatility return to the IDR spot market. However, if both the IDR and inflation remain stable, we feel this could allow the central bank to have some breathing room, which means rates will stay put into 2019.

Source: AmInvest Research - 2 Oct 2018