Indonesia: Inflation loses further traction – UOB

Economist at UOB Group Enrico Tanuwidjaja and Haris Handy at UOB Group assessed the latest inflation figures in Indonesia.

Key Quotes

“Inflation print for June 2020 slowed to 1.96% y/y vis-à-vis May’s 2.19%; the lowest annual inflation rate since 2000 in June (at 2.04% y/y) and slightly below the central bank’s target range. Indonesia National Statistics Bureau (BPS) reiterated that the low inflation print seen year-to-date was due to weaker purchasing power as the pandemic reined in consumer demand.”

“Core inflation eased further for the 4th straight month in June to 2.26% y/y, indicating weaker demand amidst large-scale social restrictions that have been imposed by the government since the end of March to control the spread of COVID-19. Food inflation slowed to 3.03% y/y in June vs. 3.37% in May. Clothing and footwear inflation slowed to 1.27% y/y in June vs. May’s 1.95%. Meanwhile, transportation as well as information-communication-and-financial services prices dropped the most, deflating by 0.95% y/y and 0.3% y/y, respectively.”

“Going forward, we expect the headline inflation to remain under control. Basic needs remain as top priority as consumers still hesitant to purchase non-essential goods. The central government and regional administrations will continue to consistently maintain the price stability. Overall, with inflation likely to stay around the lower end of the government’s 2.0-4.0% inflation target, Bank Indonesia (BI) continues to have room for lower interest rate; particularly given that growth momentum is still threatened by the COVID-19. We keep our forecast of another 25 bps rate cut in Q3 to end the year at 4.00%.”