OVERVIEW

● Indonesia’s headline inflation unchanged at 3.3% YoY in June for two consecutive months, but slightly higher than the consensus’ estimate of 3.2% (Bloomberg) and well within Bank Indonesia’s (BI) inflation target range of 2.5-4.5%. On a MoM basis, the index expanded at a slightly slower pace of 0.6% (May: +0.7%). Meanwhile, core inflation which excludes government-controlled and volatile food prices grew by 3.3% YoY (May: +3.1%). Inflation has remained tepid this year, as it grew just 2.9% YoY in 1H19 versus 3.3% in the same period of last year.

● The month’s CPI growth was mainly due to higher food price as well as processed food, beverages, tobacco, and clothing prices at 4.9%, 4.0% and 3.8% YoY respectively (May: +4.1%, +3.8% and +3.3% YoY respectively), suggesting a higher demand associated with festive season of Eid-ul-Fitr. Meanwhile, transportation, communication and finance index moderated sharply to 1.9% YoY (May: +3.6%).

● Mix inflation trend in the regional economies. Within South East Asia, Thailand’s inflation moderated to 0.9% YoY (May: +1.2%) on lower prices of energy, phones and apparel, slipping below Bank of Thailand’s inflation target range of 1.0-4.0%. Meanwhile, Vietnam's headline inflation moderated to 2.2% YoY (May: +2.9%) a 38-month record low. Among the advanced economy, US Fed's preferred inflation gauge, personal consumption expenditure (PCE) prices showed signs of picking up in May, it edged up to 1.6% YoY (Apr: +1.5%). In the Eurozone, inflation remained stable at 1.2% YoY, a long way from ECB's 2.0% target while core inflation bounced to 1.1% YoY (May: 0.8%).

● Rate cut a matter of time. We are revising our interest rate outlook for Bank Indonesia (BI) to one rate cut this year somewhere in 3Q19. This is largely due to a stable inflation despite a pick up on festive season recently, while the Rupiah currently remained steady approaching below 14,000 level against the USD providing a room for BI to cut its 7- day reverse repo rate currently at 6.00%. Meanwhile, we forecast Indonesia's inflation to hit the lower end of our target growth range of 3.1-3.6% (2018: 3.2%) this year against consensus' 3.5% driven by slower growth outlook arising from the downside risk from the external sector as well as possibility of any future changes in the government’s policy related to its fuel and food subsidy.

Source: Kenanga Research - 2 Jul 2019