Mon wheat

ECONOMIC UPDATE - Inflation - The disinflation rate hit its slowest pace since October-22



The food group contributes to monthly disinflation

According to Statistics Indonesia (BPS), the monthly inflation rate slowed to -0.02% MoM in August, compared to July's inflation rate of 0.21% MoM. This disinflation marks the lowest level since October 2022. Moreover, this rate was lower than both our projected estimate of 0.14% MoM and the consensus estimate of 0.05% MoM. The primary factor behind this disinflation was the food, beverages, and tobacco basket, which contributed -0.07% MoM to the inflation rate. This basket experienced a contraction of -0.25% MoM, primarily due to the impact of the August harvest. In contrast, the education group showed the highest growth, recording a 0.86% MoM increase and contributing 0.05% MoM to the inflation rate. This trend coincides with the beginning of the new school year. Furthermore, the core inflation rate for August was reported at 0.13% MoM, consistent with the previous month's figure. In addition, volatile food prices demonstrated a deflation rate of -0.51% MoM, marking a decline from July's 0.17% MoM increase. Meanwhile, administered prices experienced a deceleration to -0.02% MoM, in contrast to a rate of 0.44% MoM in the previous month.


The yearly inflation rate rebounds but remains within the target range

On a yearly basis, the inflation rate in August was recorded at 3.27% YoY, indicating a faster pace compared to the previous month's rate of 3.08% YoY. Nevertheless, this rate remains within the central bank's target inflation range of 2%–4%, marking the fourth consecutive month within the target range. The inflation rate was also lower than both our projected estimate and the consensus, with figures of 3.44% YoY and 3.34% YoY, respectively. Notably, the transportation basket exhibited the highest growth and was the biggest contributor to the inflation rate, rising by 9.65% YoY and contributing 1.18% YoY to the inflation rate. In contrast, the information, communication, and financial services basket experienced deflation, recording a rate of -0.22% YoY and contributing -0.01% YoY to the deflation rate. The yearly inflation rate increased, despite being recorded as deflation on a monthly basis. This was primarily due to the lower base effect in August 2022.The headline inflation rate in August 2022 experienced a contraction of -0.21% MoM and 4.69% YoY, marking the most significant monthly disinflation rate since June 2021. Furthermore, core inflation reported a value of 2.18% YoY, falling below both our estimated value of 2.34% YoY and the consensus estimate of 2.33% YoY. August’s core inflation rate decelerated compared to the previous month’s rate of 2.43% YoY.


Inflation rate by expenditure groups

On a yearly basis, most of the expenditure groups increased in August, namely: food, beverages, and tobacco group of 3.51% YoY; clothing and footwear group of 1.12% YoY; housing, water, electricity, and household fuel group of 1.40% YoY; furnishings, household equipment, and routine household maintenance group of 2.21% YoY; health group of 2.69% YoY; transportation group of 9.65% YoY; recreation, sport, and culture group of 1.88% YoY; education group of 2.07% YoY; food and beverage serving services/restaurant group of 2.88% YoY; and personal care and other services group of 3.76% YoY. On the other hand, the information, communication, and financial services group reported a deflation of -0.22% YoY.


BI's policy to maintain inflation and promote economic growth

Bank Indonesia (BI) opted to maintain its benchmark rate (BI7DRRR) at 5.75% in August 2023, aligning with both our expectations and the consensus. This decision signifies the seventh consecutive month of unchanged key interest rates, with the deposit and lending facility rates staying constant at 5.0% and 6.5%, respectively. This choice is in line with the ongoing monetary policy strategy, aiming to retain control over inflation within the targeted range of 2–4%. Additionally, this rate strategy focuses on upholding the stability of the Rupiah exchange rate, thus mitigating potential disruptions stemming from uncertainties in the global financial market. To stimulate domestic economic growth, BI continues to implement loose macroprudential policies. BI has announced its intention to further relax the rules on required reserves for banks that provide loans to specific sectors such as housing, tourism, agriculture, small and medium enterprises (SMEs), downstream, and green financing. We believe that maintaining the BI7DRRR could help keep the inflation rate within the target range. Meanwhile, the liquidity incentives for banks would bolster loan disbursements and economic growth. We expect that loan disbursements and economic growth will reach 9.0% YoY and 5.0% YoY, respectively, this year.


Counteract stronger USD with SRBI

The expectation of a 'higher-for-longer' US policy rate has gained strength after the Jackson Hole conference, leading to a rally in the value of the USD. The depreciation of the Rupiah could contribute to imported inflation. In response to the risks posed by both the rising Federal Funds Rate (FFR) and a strong USD, Bank Indonesia (BI) has initiated several measures. One of these measures is the introduction of the Sekuritas Rupiah Bank Indonesia (SRBI), which serves as a pro-market monetary operation. This instrument aims to further develop the money market, attract foreign capital inflows in the form of portfolio investments, and optimize the use of Indonesian government bonds (SBN) owned by BI as underlying assets. The SRBI will replace the central bank’s reverse repurchase operations for the 6, 9, and 12-month tenors. We believe the SRBI will make Indonesia’s bond yields more attractive to foreign investors, thereby bolstering the Rupiah. Additionally, the export earning regulation (DHE) also is expected to strengthen foreign exchange reserves and the Rupiah. Furthermore, we project the Rupiah to reach Rp14,910/USD by the end of this year.