Indonesia’s Inflation Rate Drops to Lowest in Almost a Decade

(Bloomberg) -- Inflation in Indonesia eased to a near-decade low, boosting odds that the next interest rate move by policy makers in Southeast Asia’s biggest economy could be down.

Consumer prices rose 2.57 percent in February compared to a year earlier, the lowest since November 2009, according to figures released by the statistics office in Jakarta on Friday. That was lower than the 2.75 percent median estimate in a Bloomberg survey of 24 economists.

Indonesia’s Inflation Rate Drops to Lowest in Almost a Decade

Key Insights

  • The inflation slowdown gives policy makers further reason to call an end to an aggressive tightening cycle -- a total 175 basis points of rate hikes since May. Bank Indonesia has kept its key rate unchanged at 6 percent in the past three policy meetings
  • Inflation is now at the lower end of the central bank’s 2.5 percent to 4.5 percent target band. Price pressures have been steadily easing since last year amid subdued fuel and food costs
  • Consumer prices fell 0.08 percent in February from the previous month, compared with a median estimate for a 0.04 percent decline, led by a drop in food
  • The benign inflation environment provides President Joko Widodo with a timely election booster as he bids for a second term. The presidential election is set for April 17 with the cost of living seen as a key voter concern
  • Across the region, inflation is moderating. Consumer prices in Malaysia fell for the first time in a decade in January, while the Philippines is also set to report a slowdown next week

Economists’ Views

  • Enrico Tanuwidjaja, the head of economics and research for PT UOB Indonesia in Jakarta, said inflation may remain benign for a while and that the case for Bank Indonesia to begin cutting rates has strengthened. "We have indeed changed our forecast for BI to start normalizing its policy rate in the fourth quarter of 2019 if conditions warrant," he said, adding that Bank Indonesia may cut rates by a cumulative 50 basis points in the final quarter of the year
  • "Softening headline inflation and relative stability in the IDR, coupled with a less hawkish Fed, diminish the possibility of further monetary policy tightening," Australia & New Zealand Banking Group Ltd. economists Krystal Tan and Sanjay Mathur said. The bank is now reviewing its forecast for a 25 basis point hike in 2019. "That said, recent trends in Indonesia’s trade data suggests a rate cut is unlikely anytime soon given BI’s emphasis on external stability"

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