Indonesia's March inflation soared to 5.9%

Blame it on steady food price hike.

According to DBS, headline inflation has already hit 5.9% YoY in March on the sustained uptick in food prices. Notably, the inflation figure has already pushed above the central bank’s (BI) target range of 3.5-5.5% and we are looking for a rate response via a hike in the FASBI deposit rate by 2Q. 

A breakdown of CPI by components reveals that only food prices are elevated at this point and this is due in large part to import policies that have caused prices of selected spices to shoot up.

The fastest way to bring down food price inflation will be to adjust policies to allow greater supply of the selected spices into the domestic market.

Here's more from DBS:

However, if the government is not able to respond in a timely manner, inflation expectations may become unhinged leading to spillover effects (higher prices) on other goods.

It also does not help that there are still uncertainties regarding the government’s fuel subsidy policy, which can further feed inflation expectations.

From an external accounts standpoint, BI has opted to tolerate rupiah weakness to facilitate adjustments in the current account. However, the tradeoff is higher imported inflation that is starting to feed through.

With the trade balance still in deficit and the current account widening through to 4Q12, some monetary tightening is needed and it could come as early as this Thursday. We expect a gradual normalization in the interest rate corridor via a cumulative 75bps worth of hikes in the FASBI deposit rate by end-13.