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ECONOMIC UPDATE - Inflation - Cue to be more hawkish



Inflation revs up

After laying low in all over 2021, the inflation settled back within Bank Indonesia (BI) target at 3±1% YoY. Statistics Indonesia (BPS) recorded a 0.56% MoM (2.18% YoY) of inflation in Jan-22. The inflation rate was higher than our estimate at 2.12% YoY and slightly higher than Bloomberg consensus at 2.17% YoY. As expected, the inflation will be within BI’s target in 2022. We see the acceleration of inflation may continue in the next months, as it will be driven by shortage of supply under Covid-19 3rd wave. The 3rd wave of Covid-19 may hinder the acceleration of inflation in 1Q22 but the inflation rate will go way higher for sure in 2Q22 assuming the government successfully pulls the Covid-19 containment. 


No celebration without foods

The highest growth and the biggest contributor of inflation was food, beverage and tobacco basket where it contributed 0.30% to the inflation and rose by 1.17% MoM (3.45% YoY). The main determinant of inflation in this basket was chicken at 0.07% followed by fish at 0.03% to total inflation. This is normal as there were several big days in Jan-22 such as the New Year celebration and approaching Chinese New Year. Besides, chicken price might rise because there was a rise as well on the chicken feed. 


BI-Fast brings deflation

Information, communication and financial services basket contributed to deflation by 0.01%. One of the reasons was the decrease in money transfer administration fee.  Thanks to the implementation of BI-Fast program. Through this program, inter-bank transfer fees are reduced to Rp2,500/transaction. As much as 21 banks and 1 non-bank financial institution have entered as participants in the second batch of BI-Fast. This made financial services basket as the only basket that brought deflation.


Preparing for 3rd wave

As of Feb 2nd 2022, there were additional 17,895 new cases of Covid-19 in Indonesia. Thus, the total confirmed cases reached 4,387,286. Besides, more than 312 mn doses of the vaccines have been administered. Thus, Indonesia has vaccinated about 57.8% of the population with second dose. The promising result of Covid-19 handling in Indonesia brings brighter prospect to the economy. This was reflected by Consumer Confidence Index (CCI) in Indonesia where it remained high at 118.3 in Dec-21 (vs 118.5 in Nov-21). On the other hand, we see the government is reluctant in imposing Level 4 and 3 PPKM if there has not been a big case explosion of Covid-19 in particular region. Because of that, under the recent 3rd wave as well, we see CCI in Feb-22 will be very limited and may inch down by 10 points. Thus, it leads to the lower inflation in Feb-22.


BI-7DRRR stays unchanged

Although the inflation is already within BI target in the beginning of 2022, we see BI will wait until the inflation gets higher substantially. We believe that this is the cue where BI may need to shift the stance from extremely accommodative towards market to be more a little bit hawkish. We know that the Fed rate and the current 3rd wave obscure the BI-7DRRR hike trajectory. However, we see the first rate hike is more likely to be taken after the next FOMC in Mar-22. Back to inflation, we remain optimistic that the inflation in 2022 will stay manageable. All in all, we raised our estimate of inflation to 3.6% YoY (prev. 3.2% YoY) for YE 2022 as the household consumption recovers faster than we predict before. Moreover, the severity of Omicron variant is more benign than previous variants. Thus, we see BI will hold the rate at the current level on Feb, 9th – 10th 2022 to stay accommodative and to keep the market stays alluring.