• Headline inflation moderated to 2.61% YoY in December (Nov: 2.86%), below the consensus of 2.72% but still within Bank Indonesia’s (BI) target band of 2.0% - 4.0%. For 2023, inflation settled at 3.67%, a tad lower than the house forecast of 3.80%
  
  − MoM (0.41%; Nov: 0.38%): expanded to a 12-month high.
  
  − Core inflation (1.80% YoY; Nov: 1.87%): moderated slightly, the lowest since December 2021.

• Moderate price pressure due to slower food prices and housing, water, electricity & other fuel
  
  − Food, beverage & tobacco (6.18%; Nov: 6.71%): moderated but remained relatively high due to higher prices of several food commodities such as rice and chilli, and in line with festive season holidays.
  
  − Housing, water, electricity & other fuel (0.50%; Nov: 1.12%): slowed sharply.

• Mixed inflationary pressure across the region
  
  − VN: headline inflation expanded in December (3.6%; Nov: 3.4%), bringing the 2023 average to 3.3% (2022: 3.2%), the highest since 2018.
  
  − SG: headline inflation moderated in November (3.6%; Oct: 4.7%). Similarly, core inflation, Singapore’s key consumer price gauge, also slowed to 3.2% (Oct: 3.3%).

• 2024 average inflation is projected to moderate to 3.2% (2023: 3.67), within the BI target range of 1.5% - 3.5%
  
  − Price pressures are expected to stabilise in the 1H24, but upside risks remain due to the upcoming festive season period and the effects of a prolonged El Nino. Escalating geopolitical tensions may disrupt the global supply chain and raise food prices due to a weaker rupiah. However, a cumulative 250 basis points rate hike by BI is expected to mitigate price pressures moving forward.
  
  − On the monetary policy front, we expect that BI will keep the policy rate at 6.00% at least through the 1Q24, to control inflation and to support the fragile rupiah amid global financial market uncertainty. However, BI still has considerable scope to cut its policy rate, considering that the current restrictive monetary policy could hinder growth prospects.

Source: Kenanga Research - 3 Jan 2024