• Headline inflation expanded to 2.75% YoY in February (Jan: 2.57%), above the consensus of 2.60% but within Bank Indonesia’s (BI) target band of 1.5% - 3.5%
  
  − MoM (0.37%; Jan: 0.04%): expanded to a two-month high.
  
  − Core inflation (1.68% YoY; Jan: 1.68%): remained unchanged, marking the lowest since December 2021.

• The inflationary pressure was primarily due to higher food prices and a pick-up in transportation price
  
  − Food, beverage & tobacco (6.36%; Jan: 5.84%): increased to a two-month high and remained above the 2023 average (4.89%).
  
  − Transportation (1.40%; Jan: 1.11%): expanded to a two-month high, partly due to relatively higher fuel prices.

• Mixed inflationary pressure across the region
  
  − VN: headline inflation rose in February (4.0%; Jan: 3.4%), the highest since February 2023, as MoM accelerated (1.0%; Jan: 0.3%) amid strong domestic demand during the Lunar New Year holiday.
  
  − PH: inflation eased sharply in January (2.8%; Dec: 3.9%), the lowest since October 2020 (2.3%) amid lower inflation of food and non-alcoholic beverages (3.5%; Dec: 5.4%).

• 2024 average inflation forecast retained at 3.2% (2023: 3.7), due to the lingering effects of El Nino on food inflation
  
  − Risk to domestic inflation remains tilted to the upside largely due to the upcoming festive season period and the effects of the El Nino weather pattern. Besides, escalating geopolitical tensions may also disrupt the global supply chain and raise food prices due to a weaker rupiah.
  
  − On the monetary policy front, we continue to expect BI to maintain its status quo in the 1H24, with the policy rate on hold at 6.00%, mainly to ensure inflation is under control and to support the fragile rupiah amid global financial market uncertainty. However, we believe BI has ample room to cut its policy rate to support the growth outlook. With that said, we project BI to cut rates to 5.25% by the end of the year.

Source: Kenanga Research - 1 Mar 2024