Headline inflation remained moderate, slowing to 3.23% y/y while core inflation picked up to 2.75% y/y in May due to the commencement of the Ramadan fasting season from mid-May. In the recent BI tightening of the policy rate, its focus was on the weakening of rupiah rather than inflation. We believe BI’s potential monetary policy direction in 2018 will be governed by the rupiah rather than inflation, which should rise due to the Ramadan period. We have pencilled another 25bps rate hike in the June 28 policy meeting, and expect BI to stay neutral thereafter as it will need to keep the rupiah in a consolidation mode. But room for BI to take a breather in June cannot be ruled out due to the slower inflation and steady rupiah.

• Headline inflation remained moderate, slowing to 3.23% y/y in May from April’s 3.41%. The first five-month average is 3.3%, still below Bank Indonesia’s (BI’s) point target of 3.5% but is well within the target range of 2.5% to 4.5%. But core inflation picked up to 2.75% y/y in May from April’s 2.69% y/y. It is fairly predictable owing to the commencement of the Ramadan fasting season from mid-May.

• In the recent BI tightening of the policy rate, its focus was on the weakening of rupiah as opposed to inflation. We see this as a threat to the stability of the economy and financial sector. Following the two rate hikes in May, each by 25bps to now at 4.75%, we noticed the IDR has gained and stabilised. The recent pre-emptive tightening took into consideration the US Fed will hike the policy rate in mid-June. Though the market is looking at around 87% for a rate hike, we are maintaining our 90% chance.

• We believe BI’s potential monetary policy direction in 2018 will continue to be governed by the rupiah rather than inflation though we foresee some upwards inflationary pressure in May and June due to the Ramadan period.

• We have pencilled another 25bps rate hike in the June 28 policy meeting by BI. Following a rate hike in June, we expect BI to stay neutral as it will need to keep the rupiah in a consolidation mode. Meanwhile, room for BI to take a breather during the June’s policy meeting cannot be ruled out in view of the slower inflation and steady rupiah.

Source: AmInvest Research - 5 Jun 2018