Indonesia core CPI likely to moderate on lower crude prices, stronger rupiah

Core inflation is likely to moderate in Indonesia on lower overseas crude oil prices amid an upbeat domestic currency. However, price expectations are rising as the country nears the Ramadan month, when demand is likely to pick up, albeit for a short period.

Core consumer price index is projected at 3.5 percent y/y in May, bringing the year-to-date average to 3.5 percent. However, this is the lowest start of the year since at least 2009, DBS reported.

As far as outlook for gross domestic product is concerned, it is seen positive if inflation returns to the 4 percent level, going forward. Meanwhile, private consumption, a remarkable support to the overall GDP, is yet to be witnessed above 5 percent.

"If private consumption continues to grow at just 5 percent, it is hard to expect GDP growth to deviate too much from 5 percent. This is of course barring a significant surge in investment growth or a bounce in export growth, both of which seem fairly unlikely for now." DBS said in a research statement.

From a Central Bank’s perspective, there remains much room and scope for Bank Indonesia to ease policy rate; however, that does not compulsorily mean a rate cut. Recent comments from BI officials suggest that the central bank may ease previous loan restrictions, in a bid to boost loan growth, which remains well below the 10 percent mark.