OVERVIEW

● Headline inflation grew by 2.5% YoY in March marginally slower than February’s 2.5%, matching consensus estimate, but sits at the lower end of Bank Indonesia (BI) inflation target range of 2.5-4.5%. On a MoM basis, the index rebounded by 0.1% after a brief decline in February (-0.1%). Meanwhile, core inflation inched lower to 3.0% YoY (Feb: 3.1%).

● The month’s moderation in CPI growth was mainly due to the slowdown in the index of transportation, communication and finance. It grew by just 3.1% YoY (Feb: 3.3%), the slowest since November 2018, thanks to populist-driven policy by President Jokowi who decreed to keep fuel prices stable over the next two years ahead of April 17 presidential election. On MoM, the index growth was unchanged at 0.1%, pointing to a stable price level on the back of subsidised gasoline amid rising price in global Brent crude oil in March. Similarly, food prices edged lower to 0.6% YoY (Feb: 0.7%) marking a 16-month record low. Meanwhile, processed food, beverages, tobacco and education, recreation and sports registered a sustained rise in YoY growth at 3.6% and 3.3% respectively for two straight months.

● Mix inflation trend in the regional economies. Within South East Asia, Thailand’s inflation edged higher to a sixmonth high of 1.2% (Feb: 0.7%) which fall within Bank of Thailand inflation target range. Similarly, Vietnam’s headline inflation inched up to 2.7% YoY (Feb: 2.6%) underpinned by an increased in the cost of food and education services. Meanwhile, Eurozone inflation slowed to 1.4% YoY (Feb: 1.5%) far away from European Central Bank’s target of below, but close to 2.0% over the medium term.

● BI in a sweet spot. Its policy rate is likely to stay put for the year though the central bank has ample room to reverse its hawkish six interest rate hikes last year. As BI focusses on measures to encourage banks to lend more to boost the economy, we believe there is no urgency to lean on monetary easing. Along with the expectation that the Rupiah will continue its uptrend, we expect inflation to bounce back if there is a policy reversal to adjust fuel prices after the election. Additionally, with the potential impact of El Nino on food prices and expectation on growth slowdown, we forecast Indonesia’s inflation to range between 3.1-3.6% against consensus’ 3.5%.

Source: Kenanga Research - 2 Apr 2019