Indonesia’s inflation to remain within BI’s target range in March, April

The Indonesian economy, which faced certain challenges in 2015 such as weak rupiah, slowing growth and high inflationary pressures, saw certain positive surprises in 2016. The economy expanded 5.04% y/y in Q4 2015 and grew 4.79% in full year 2015. The full year growth was still the lowest seen since 2009 mainly because of weak growth levels witnessed in first half of 2015. Last year, increased government spending after a series of stimulus measures introduced in Q3 and Q4 mainly drove economic growth. This led to rebound in demand and investment levels.

A certain development is expected to have been made on implementing the stimulus measures, according to 4cast.  Moreover, additional measures have been announced for 2016 that are a “step-up” from the policy packages announced in late 2015 and are targeted at a larger scale. Meanwhile, Indonesia’s external sector has continued to be weak with China concerns growing after the economy recorded growth of 6.9% in 2015, weakest in 25 years. Slowdown of the Chinese economy has also led to additional downward pressure on oil and commodity prices in early 2016.

Indonesia’s exports slowed by 21.38% y/y in January and were the weakest in more than three years. However, exports in February rebounded considerably. In November and December, Indonesia’s trade balance entered into negative territory as the drop in imports was not sufficient to cover up for weakness in exports. Indonesia’s exports environment is unlikely to rebound considerably in the coming months as there is no sign of global recovery yet, according to 4cast.

Meanwhile, since November 2015, inflationary pressures eased slight as rise in fuel price in 2014 was lapped and declined to 3.35% y/y in December. Inflation, however, accelerated in February to 4.34% y/y but continues to be within Bank Indonesia’s target range of 3-5%. Also, the BI has used this chance to loosen its monetary policy.

Supply side factors, such as oil prices, are likely to continue pushing inflation higher while seasonal factors are expected to keep prices elevated, says 4cast. According to the central bank, m/m inflation in March and April will moderate.

“We hold the view that inflation will likely remain within the central bank's 3-5% target range”, says 4cast.

Investment and consumption demand are likely to continue boosting the economy as President Widodo announces additional policy packages and makes sure the reforms are being implemented. According to 4cast, easing bias in Indonesia’s monetary policy, in spite of global challenges, will also assist in expanding economy in the coming months.

“External sector volatilities should also ease by H2 and we maintain our 2016 growth forecast at 5.20%. This still falls at the lower end of BI's target range of 5.2-5.6%, which was revised lower from the 5.3-5.7% target given earlier”, says 4cast.

The central bank has received enough room to lower policy rates in 2016 with relatively stable rupiah and low inflation levels. The central bank also faces pressure to cut rates given the easing of policies by other central banks. The BI is expected to further lower rates but not more than two before the end of 2016, added 4cast.