Indonesia’s CPI inflation rises slightly in September, likely to remain contained in 2016

Indonesia’s headline CPI inflation rose slightly in September, owing to increased food prices arising from the raining season. Inflation came in at 3.07 percent, higher than the prior month and consistent with expectations, said ANZ in a research note.

Weak food and oil prices, apart from soft domestic demand are expected to keep inflation contained, according to ANZ. Food inflation is anticipated to be on a lower glide path after peaking 9 percent year-on-year in March. The rest of the CPI basket of Indonesia is likely to remain benign.

Meanwhile, tax amnesty inflows have increased to IDR 97.2 trillion revenue, equivalent to 59 percent of the government’s IDR 165 trillion target. But, growth is expected to be subpar. The central bank, Bank Indonesia has lowered its forecast range for growth this year to 4.9 percent – 5.3 percent, from its earlier estimate of 5 percent – 5.4 percent because of likely to slower public spending in the second half of this year. The monetary policy requires being on the front burners in the midst of fiscal constraints, particularly with room made by the inflation undershoot, added ANZ.

“The outlook for inflation will remain contained and we see it comfortably at the lower bound of Bank Indonesia’s (BI) 3 percent-5 percent y/y inflation target range by the end of the year”, according to ANZ.

Sluggish inflation, along with stability in both exchange rates and the current account deficits, give scope for additional rate cuts. The central bank is likely to lower the 7-day reverse repo rate by further 25 basis points to 4.75 percent during its October meeting, said ANZ.