VIEW: Falling Inflation Means BI Risks Tilted To Easing

CPI inflation in July continued to moderate with both headline and core well within BI’s target band.

• Pantheon points out that there was “a sharp fall in transportation inflation, to 9.6% from 10.2%, as the one-off lift from last year’s fuel price hikes fades further from the picture. This boost will disappear completely in September, resulting in a sharp drop in the headline rate to the 2.0% lower-bound of BI’s current target range.” “We now see headline inflation averaging at 2.0% next year, staying below the new 2.5% midpoint of BI’s target range for 2024. Our base case for rate cuts remains unchanged, with Q4 and Q1 each likely to see one 25bp cut.”
• JP Morgan notes that inflation has been trending down in part due to “supply side reforms undertaken in recent years which has had a notable impact on food prices”. In terms of monetary policy, “our modal view is for Bank Indonesia to maintain its policy rate at 5.75% through this year reflecting the expected narrowing of its current account balance and external uncertainties. … with risks tilted towards easing.”
• Goldman Sachs observes that food and transport prices drove the moderation in headline inflation with core declining “due to lower housing and utilities with a partial offset from higher education cost inflation”. “Going forward, despite well-behaved inflation, we continue to expect Bank Indonesia to keep the policy rate on hold until the end of the year given policymakers' focus on IDR stability.”