● Headline inflation moderated sharply to 3.52% YoY (May: 4.00%), lower than the consensus of 3.64% but within Bank Indonesia’s (BI) inflation target band of 2.0% - 4.0%

− MoM: expanded (0.14%; May: 0.09%) to a two-month high despite the absence of the festive season period.

− Core inflation: edged down (2.58% YoY; May: 2.66%), lowest since May 2022.

● A broad-based moderation led by slower expansion in food, beverage & tobacco and followed by transportation and household equipment & routine maintenance

− Food, beverage & tobacco (2.85%; May: 4.27%): slowed sharply to a 16-month low.

− Transportation (10.18%; May: 10.62%): moderated to a ten-month low but remained at a double-digit rate.

− Household equipment & routine maintenance (2.57%; May: 3.03%): moderated, the lowest since December 2021.

● Inflationary pressure broadly moderated across the region

− VN: CPI moderated in June (2.0%; May: 2.4%), the lowest since February 2022, providing support and reason for its central bank to cut its refinance rate to prop up the slowing economy.

− PH: inflation slowed further in May (6.1%; Apr: 6.6%), the lowest since June 2022, and its fourth straight month of moderation from the peak in January 2023 (8.7%).

● 2023 inflation forecast retained at 4.0% (2022: 4.21%), as upside risk remains in the 2H23

− We retain the inflation forecast unchanged for now as the year-to-date inflation remained elevated at 4.59% while there is still an upside risk to inflation amid the impact of El Nino. Nonetheless, we believe inflationary pressure would moderate thanks to improving supply chain, lower commodity prices and the impact of the cumulative 225 basis points rate hikes embarked on by BI since August 2022.

− Likewise, we maintain our monetary policy rate outlook, with BI expected to keep the policy rate unchanged at 5.75% for the rest of the year. Nevertheless, the likelihood for BI to adjust the policy rate in the future would largely depend on the stability of the rupiah, as the local note remains susceptible to global financial uncertainty, especially on the US Fed’s policy direction.

Source: Kenanga Research - 4 Jul 2023