Indonesia Economic Briefing: Inflation Unprecedentedly Low

The statistics office announced an inflation of 0.21% mom for the month of May-18. There was an unprecedented condition towards the run up and during seasonal fasting month, whereby the increase in staple food prices were well contained (Please see Chart 1). While other items within the CPI components did not show significant differences compared to previous trends.

We have questioned in the past on how the government would defend against both inflation and import amid high oil price. Yet it was interesting to see from Chart 2 that the value of oil import was relatively flat compared to last year, despite the Brent price moving up by 26% yoy. Apparently, State Owned Oil Company had taken over and operated 2 additional refineries since the beginning of this year, which allowed them to reduce dependency on imported refined oil and switch to a much cheaper crude oil import.

What to Watch? Our call is for policy rates to be on hold at the next MPC meeting (28 Jun), but expect another 25bps hike on the horizon. Keeping in mind that BI has finally shifted its stance to a tightening bias and the change in tone on interest rate was only a matter of weeks, we deem necessary to follow some data releases. FOMC announcement would come out on June 14th (JKT Time), yet local markets would only be active a week later on the 21st, thus having a potential risk for wide opening. Another key data to look forward to is the publication of May-18 FX reserve this Friday. We expect a sizable depletion to justify the sudden shift in monetary policy that had manifest last month.

Writer is Chief Economist at Treasury & Capital Market Division of Bank Danamon Indonesia

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