Monthly deflation driven by electricity discount and higher food stocks
According to Statistics Indonesia (BPS), Indonesia recorded a monthly deflation of -0.48% MoM in Feb-25, extending the deflationary trend from the previous month. This figure was well below our projection of +0.15% MoM and the consensus forecast of +0.11% MoM. The primary driver of deflation was a 3.59% MoM decline in the Housing, Water, Electricity, and Household Fuel sector, which contributed -0.52% to the overall deflation rate. This sharp drop was mainly attributed to a 50% reduction in electricity prices for households with a maximum power capacity of 2,200 VA. Additionally, the Food, Beverages, and Tobacco sector recorded deflation of -0.12% MoM, driven by higher food stock, while volatile food prices fell -0.93% MoM, a sharp reversal from +2.95% MoM in Jan-25. Administered prices also recorded deflation of -2.35% MoM in Feb-25, following -7.38% MoM in Jan-25, largely due to the electricity tariff discount, despite the government's decision to increase non-subsidized fuel prices. In contrast, core inflation rose by +0.25% MoM in Feb-25 (vs. +0.30% MoM in Jan-25), primarily driven by higher gold jewelry prices. Looking ahead, we expect inflation to rise in Mar-25, driven by increased demand during Ramadan and Eid al-Fitr, as well as the expiration of the electricity tariff discount.
First annual deflation in 25 years
Indonesia's annual inflation rate fell to -0.09% YoY in Feb-25, marking the first deflation since March 2000 and dropping below Bank Indonesia’s lower target of 1.5% YoY. This figure was also significantly lower than our estimate of 0.64% YoY and the consensus forecast of 0.55% YoY. The Housing, Water, Electricity, and Household Fuel sector was the largest contributor to deflation, contributing -1.92% YoY from the headline disinflation rate, as prices in this category plunged by -12.08% YoY in Jan-25. In contrast, the Food, Beverages, and Tobacco sector was the highest contributor to inflation at 0.66% YoY, with prices rising 2.25% YoY. Administered prices recorded significant deflation at -9.02% YoY in Feb-25, deepening from -6.41% YoY in Jan-25, mainly due to electricity tariff discounts in January and February 2025. Meanwhile, volatile food inflation declined to 0.56% YoY in Feb-25, down from 3.07% YoY in Jan-25. On the other hand, core inflation edged higher to 2.48% YoY in Feb-25 (vs. 2.36% YoY in Jan-25), exceeding both our estimate of 2.45% YoY and the consensus forecast of 2.42% YoY. Looking ahead, we expect inflation to gradually normalize as the impact of electricity tariff discounts fades, leading to a potential rebound in administered prices, particularly if the government adjusts fuel or transportation costs. The government’s stance on energy subsidies and pricing policies will be a key factor shaping inflation for the rest of the year. Additionally, we anticipate a rise in core inflation, driven by higher gold jewelry prices, as investors shift toward safe-haven assets amid global uncertainty. Volatile food prices may also pose a challenge, partly influenced by the free nutritious meal program. Considering these factors and January’s deflationary trend, we maintain our FY25 inflation forecast at 2.0% YoY
Capital outflows weaken Rupiah despite easing dollar pressure
The Rupiah depreciated by 2.70% MoM to Rp16,580/USD in Feb-25, driven by a significant capital outflow from the stock market at -USD1,110.6 mn(vs. capital inflow into the bond market of USD506.8 mn). We attribute this substantial equity outflow to MSCI's downgrade of Indonesia’s weighting from equal weight to underweight. Additionally, a 11.65% MoM decline in coal prices to USD102.05/ton, a key export commodity, further pressured the Rupiah's depreciation. Negative sentiment was also fueled by i) Bank Indonesia’s plan to buy bonds that will be issued by the government to fund its housing program is raising more concerns over the nation’s debt governance. ii) The launch of Danantara, the nation’s newest sovereign wealth fund, with USD20 bn in initial capital appeared to face challenges in gaining investor confidence. Meanwhile, Bank Indonesia (BI) maintained its policy rate at 5.75% in Feb-25, a reasonable decision given low inflation and Rupiah volatility. On the global front, the Dollar Index (DXY) fell to 107.3 in Feb-25 (vs. 108.3 in Jan-25), while the U.S. 10-year government bond yield declined to 4.20% (vs. 4.53% in Jan-25), reflecting expectations of a potential Fed rate cut. This is driven by weak U.S. economic data, including a slowdown in GDP growth to 2.3% YoY in 4Q24 (vs. 3.1% YoY in 3Q24) and a drop in job openings to 7.6 mn in Dec-24 (vs. 8.15 mn in Nov-24). According to CME FedWatch, investors anticipate the Fed will cut rates three times in 2025 , with reductions of 25 bps each in June, September, and December. However, persistent inflationary pressure from protectionist tariffs under Trump’s presidency could delay the Fed’s rate cuts. Looking ahead, we believe BI has room to lower its policy rate by 25 bps to 5.50% in 2H24 to support economic growth. However, BI is likely to wait for the Fed to cut rates first to mitigate capital outflows. To stabilize the Rupiah, BI is expected to continue utilizing pro-market monetary instruments, including SRBI, SVBI, and SUVBI, alongside interventions in the foreign exchange market through spot transactions, Domestic Non-Deliverable Forwards (DNDF), and purchases of Government Securities (SBN). Meanwhile, we revise down our average Rupiah projection to Rp16,200/USD for 2025 and Rp16,300/USD by year-end, driven by capital outflows, moderating commodity prices, and stagnant GDP growth.
