● Headline inflation slowedsharplyto2.19% YoYin May, a 20-year low (consensus: 2.15%; Apr: 2.67%) and remained closetothe lower-end of Bank Indonesia's (BI) inflation target band of 2.0-4.0%

- MoM: slowed marginally to 0.07% (Apr: 0.08%).

- Core inflation: eased to a 27-month low (2.65%; Apr: 2.85%).

● Cheaper food, beverage, and tobacco, and a decline in transportation pricedueto the impact of COVID-19 pandemicweighed on the overall inflationary downtrend

- Food, beverage, and tobacco (3.37% YoY: Apr: 5.28%): moderated sharply asdemandslowsdespitethefestive season of Eid al-Fitr, which normally would push inflation higher.

- Transportation (-1.37% YoY; Apr: -1.78%): fell for the fourth straight month, in light of travel restrictions and relatively cheaper fuel price.

● Weak inflationary trend across advanced economies

- South Korea: inflation dropped to an eight-month low in May (-0.3%; Apr: 0.1%) due to lower oil prices.

- UK: inflation fell 0.8% in April, its lowest level in four years on cheaper energy prices (Mar: 1.5%).

● 2020 CPI forecast slashed to 2.7% from an earlier estimate of 3.1% (2019: 2.72%)

- Inflation is expected to remain subdued in the coming months on the expectation of lacklustre demand, weaker growth and relatively lower fuel prices due to the impact of COVID-19 pandemic.

- This could prompt BI to embark on another rate cut at its next MPC meeting on 18 June given that BI has ample policy space to lean towards further monetary easing. Nevertheless, we remain cautious as the decision to cut policy rates would depend on the rupiah stability amid rising geopolitical risk premium, in particular, the US-China trade and domestic political tussle.

Source: Kenanga Research - 3 Jun 2020