● Headline inflation rose to 5.47% YoY (Jan: 5.28%), beating the consensus of 5.42%. However, the inflation reading is still above Bank Indonesia’s (BI) inflation target band of 2.0%

- 4.0% for the ninth straight month

− MoM: moderated (0.16%; Jan: 34%) but remained on a positive expansion for the fourth straight month. − Core inflation: edged down (3.09% YoY; Jan: 3.27%), lowest since October 2019.

● Higher inflationary pressure due to an increase in food prices, but partially capped by moderation in transportation and housing, water, electricity & other fuel prices

− Food, beverage & tobacco (7.23%; Jan: 5.82%): rose to a five-month high.

− Transportation (13.59%; Jan: 13.91%): eased to a six-month low due to the lower price of non-subsidised fuel in line with lower global crude oil prices.

− Housing, water, electricity & other fuel (3.43%; Jan: 3.62%): moderated for the second straight month.

● Inflationary pressure remained relatively high across the region

− VN: CPI moderated in February (4.3%; Jan: 4.9%) amid an increase in the cost of education, housing and construction materials, as well as culture, entertainment and tourism services.

− SG: headline inflation expanded slightly to 6.6% in January (Dec: 6.5%) due to higher import costs, a tight labour market and strong local demand. Likewise, core inflation, the central bank’s favoured price measure, remained elevated; it expanded to 5.5% (Dec: 5.1%).

● 2023 inflation forecast retained at 4.0% (2022: 4.21%) on a sign of a slowing inflation trend

− We keep the inflation forecast unchanged as it is likely to moderate towards the 2H23 and may return to BI’s target range of 2.0% - 4.0% considering the impact of previous cumulative rate hikes by BI and lower commodity prices.

− Likewise, we expect BI to keep its policy rate unchanged for the rest of the year, barring an unforeseen external shock to the rupiah and risk to inflation as well as the growth outlook. Though February’s inflation came in as an upside surprise, the core inflation is trending down, giving BI room to stay neutral. Nonetheless, the chances for BI to adjust the policy rate in future would depend on the stability of the rupiah, which could face downward pressure in the near term amid expected rate hikes by the US Fed.

Source: Kenanga Research - 2 Mar 2023