● Headline inflation moderated sharply to 3.08% YoY (Jun: 3.52%), slightly lower than the consensus of 3.10% but still within Bank Indonesia’s (BI) inflation target band of 2.0% - 4.0%

- MoM: expanded (0.21%; Jun: 0.14%) to a three-month high despite the absence of the festive season period.

- Core inflation: edged down (2.43% YoY; Jun: 2.58%), lowest since March 2022.

● Lower inflationary pressure due to slower rise in food, beverage & tobacco, transportation and household, as well as water, electricity & other fuel prices

- Food, beverage & tobacco (1.90%; Jun: 2.85%): slowed sharply to a 25-month low or the lowest since June 2021.

- Housing, water, electricity & other fuel (2.03%; Jun: 2.49%): moderated, the lowest since March 2022.

- Transportation (9.58%; Jun: 10.18%): moderated to an eleven-month low and is expected to slow sharply in the coming months amid the high base effect recorded last year.

● Inflationary pressure broadly moderated across the region

- VN: CPI expanded slightly in July (2.1%; Jun: 2.0%), driven by higher prices of other goods and services.

- SG: inflation moderated in June (4.5%; May: 5.1%), the lowest since February 2022. Similarly, its core inflation also moderated to 4.2% (May: 4.7%).

● 2023 inflation forecast revised down to 3.8% from the previous projection of 4.0% (2022: 4.21%)

- We cut our inflation target slightly as headline inflation is expected to moderate and to normalise around the 3.00% level in the coming months. This is largely due to the impact of cumulative 225 basis points rate hikes by BI since August 2022 and the high base effect recorded in 2H22. In addition, this also considers the weak commodity prices amid weaker global economic growth and the improvement in the global supply chain. On the year-to-date basis, inflation stood at 4.37%.

- Despite the downtrend in the inflation rate, we still maintain our monetary policy rate outlook, with BI expected to keep the policy rate unchanged at 5.75% for the rest of the year. We believe BI’s monetary policy stance would play a supportive role to supplement rupiah’s stability apart from its increasingly friendly investment policy amid uncertainty in the global financial market and the direction of the US Fed.

Source: Kenanga Research - 2 Aug 2023