Indonesia CPI Review: Inflation Inches Down but BI on Alert
Indonesia’s consumer price inflation eased marginally to 3% yr/yr in April on the back of declining food prices. Despite the easing, food price remain the key inflationary factor. Additionally, imported inflation as the IDR comes under pressure could keep inflation elevated in the near term. Bank Indonesia is likely to remain cautious of elevated inflation and currency volatility in the near term, but another rate hike is unlikely.
Figure 1: Indonesia Consumer Price Inflation and Main Policy Rate (%)
Source: Continuum Economics
Indonesia’s latest Consumer Price Index (CPI) release for April brought a moderate sigh of relief as inflation settled at 3% yr/yr, slightly below market expectations. However, this figure, although not alarmingly high, maintains an uncomfortable elevation, presenting a concern for Bank Indonesia. The slight deceleration in April's inflation was chiefly attributed to a slowdown in the growth of food, beverage, and tobacco prices, which exerted a notable disinflationary effect on the headline figure. Conversely, prices for transport items and personal care products saw an uptick, tempering the overall easing effect.
The core inflation, standing at 1.8% yr/yr, remained relatively stable compared to the previous month. Despite this moderation, the year-to-date average inflation of 2.8% yr/yr slightly overshoots the midpoint of the central bank's inflation target of 2.5%. This lingering inflationary pressure has kept Bank Indonesia (BI) in a hawkish stance, particularly after its unexpected policy rate hike last month in response to currency depreciation concerns. Governor Perry Warjiyo’s recent shift towards a more hawkish tone underscores the central bank's heightened vigilance against inflationary risks.
While BI has refrained from signalling further tightening in the immediate future, the prospect of additional policy measures remains contingent upon the trajectory of the Indonesian rupiah and its impact on inflation dynamics. Looking ahead, the path of inflation will likely be influenced by a confluence of factors. The unexpected key rate hike in April, aimed at bolstering the currency amid external pressures, could help contain inflationary pressures within the central bank's target band of 2.5% +/-1%. However, the lingering depreciation pressure on the rupiah poses a potential upside risk to inflation, warranting continued vigilance BI. In our view, no more rate hikes are likely in the near term. BI will maintain a hawkish stance over Q2-2024. A rate cut of 25bps is likely towards the end of Q3 2024, in our view.