Indonesia: Disinflation forces still at play – UOB

Economist Enrico Tanuwidjaja and Haris Handy at UOB Group give their views on the latest inflation releases in the Indonesian economy.

Key Quotes

“Indonesia’s annual inflation rate picked up slightly in September, marking the first acceleration since February. Inflation rose by 1.42% y/y in September vs. August’s 1.32%, in line with market expectation. Nonetheless, the consumer price index still posted a deflation of 0.05% on a monthon-month basis (similar to the previous month); indicating that demand is still subdued.”

“September’s inflation print was influenced by higher volatile food price which increased by 0.55% y/y in September vs. -1.09% in August. Meanwhile, core and government administered prices slowed to 1.86% y/y (vs. August’s 2.03%) and 0.63% y/y (vs. August’s 1.03%), respectively.”

“Going forward, we expect the headline inflation to remain under control and gradually recover towards the lower-end of the government’s 2.0-4.0% inflation target on the back of faster stimulus disbursement to boost the economic recovery. Nevertheless, downside risks remain as long as the consumers’ confidence is yet to return to pre-pandemic level, with social restrictions remaining in place in the capital of Jakarta. Overall, with inflation likely to remain benign and the government downgrading the GDP projection for the year (new forecast: -1.7% to -0.6% vis-à-vis previous forecast of -1.1% to +0.2%), we still see room for a final 25bps cut by Bank Indonesia (BI) in Q4 2020, bringing the 7-day reverse repo rate to a lower level at 3.75%. This is likely to happen, especially if IDR return to its appreciation trend.”