January’s inflation: Surprisingly better than expected

Eased due to lower administrated price

January CPI slowed to 0.51% MoM (December 2015: 0.96% MoM), but increased to 4.14% in term of annual basis (December 2015: 3.35% YoY). This was surprisingly better than our estimate as well as market expectations. A tamed inflationary pressure was supported by the positive impact of lower administered prices. It is worth noting that in January, PLN’s electricity tariff for 12 customer groups was cut by 6.8% MoM while energy prices was also slashed as Pertamina cut regular gasoline price by 4.1% and subsidized diesel by 13.8%. Additionally, Pertamina also reduced 12 kg LPG price by 4.2% in January. On the flip side, January core inflation slightly accelerated to 0.29% MoM (3.62% YoY) from previous month’s level of 0.23% MoM (3.95% YoY).

Staple food supply constraint to be the persistent inflation risk in 2016, but...     

As we can see on exhibit 3, staple food prices have risen due to shortage in domestic supplies particularly for beef, chilies and onions. Additionally, we also note that spiking staple food prices were caused by import limitation for grandparent seed for chicken livestock and corn in November – December 2015. Thus, these moves triggered higher prices for chicken and corn-related products. Over the medium term, we believe the government will stabilize staple food prices through relaxation of several import restriction policies. Nevertheless, inflationary pressure from this component may continue to persist as food supply constraint was caused by unclear food management by the government in our view.

... an expected medium-term subdued oil price may maintain 2016 CPI to below 5% YoY   

On the backdrop of these key factors, dissipating commodity demand from China and other emerging markets, continued trend of super US Dollar against major currencies and further supply abundant as Iran may force to export its oil to the world market, we believe average 2016 Brent oil price should plunge to USD37/bbl, (2015: USD53.6/bbl). Hence, we remain believe that this year’s CPI may be maintained to below 5% YoY level amid expected rising domestic staple food prices.

BOG meeting outlook: An expected further rate cut with lower RRR this month

January’s lower-than-expected headline inflation as well as continued easing monetary move from Bank of Japan should facilitate Bank Indonesia’s decision to further lower its policy rates in the next BOG meeting this month. Thus, we foresee that the central bank may cut the BI rate by 25bps to 7.00% from prior level of 7.25% which is also helped by current IDR stable level due to dovish Fed monetary-bias. Additionally, as domestic banks’ tight liquidity has remained due to crowding out effect issue triggered by fiscal side, BI could further reduce Reserve Requirement Ratio for both of primary and secondary to help relieving tight liquidity in the short-term.