Indonesia’s tight monetary policy bias to persist

The government has raised fuel prices by 7.5% over the weekend.

CPI inflation is likely to have remained around 6.3% (YoY) in March, while core inflation is also likely to be steady circa 5.0% in the month.

According to a report by DBS, while inflationary risks remain fairly limited for now, note that fuel prices are going to be revised according to movement in global crude oil price. Indeed, the government has raised fuel prices by about 7.5% over the weekend, to be effective immediately.

Headline inflation may not fall until later part of this year, when the high base effects kick in. DBS analysts caution that inflationary expectations remain elevated, partly due to the recent weakening of the rupiah.

Still, expect CPI inflation to be below 5% by the year-end, within the official target. Average CPI inflation is likely to be around 6%, lower than the 10-year average of just slightly above 7%. As far as monetary policy is concerned though, there is presumably some need to anchor confidence on the rupiah going forward. The unit has lost some 5% against the dollar thus far in 2015, making it the worst performing unit against the greenback in the region. DBS analysts expect Bank Indonesia (BI) to maintain its tight policy bias going forward.

Excessively weak rupiah may not only have unfavourable impact on inflation but also on domestic production, given its relatively high import content. Industrial production growth has recovered after the slump in mid-2013. But at circa 5% annual pace currently, it is still well below the 10% pace recorded at the end of 2012. Stronger production going forward is definitely a plus for GDP growth outlook.