Indonesian headline inflation decelerates further in July, monetary policy stance to remain accommodative

Indonesian headline inflation decelerated further in the month of July, slightly below the central bank’s target band. On a year-on-year basis, the consumer price inflation slowed to 1.54 percent, below central bank’s 2-4 percent target band. Sequentially, headline CPI dropped 0.10 percent in July, the first decline in 2020 so far.

Food prices fell 0.73 percent, leading the way, while transport prices fell 0.17 percent. Most other major components saw small rises, except personal care and other services, which rose 0.93 percent. Core inflation, which excludes volatile food and government controlled prices, rose 0.16 percent.

Price pressures are expected to remain soft for the remainder of 2020 against challenging economic conditions, noted ANZ in a research report. While activity has picked up since the relaxation of movement restrictions in June, consumer confidence still continues to be quite soft. The continued spread of the virus could also undermine the recovery.

“Accordingly, the monetary policy stance will remain accommodative. However, Bank Indonesia’s (BI) shifting focus toward quantitative easing suggests the rate cutting cycle is over and we expect the policy rate to end the year at 4.00 percent. Meanwhile, the trajectory of the IDR will have an influence on BI’s scope to manoeuvre”, added ANZ.