Jakarta. Bank Indonesia will likely be comfortable with inflation staying below 5 percent, providing room for the central bank to cut its key rate in the first and second quarters, analysts said.
Indonesia's annual inflation rate was 3.35 percent in December, the lowest year-on-year reading since December 2009 and significantly eased from November’s 4.89 percent, the Central Statistics Bureau announced today.
“[It was] above our and consensus expectations. The sharp decline in headline inflation was helped by the high base last year as the aggressive fuel subsidy cut pushed up gasoline prices nearly 31 percent,” Barclays economists Wai Ho Leong and Angela Hsieh wrote in a note to clients on Monday.
Barclays estimated Indonesia’s December headline inflation at 2.9 percent, while market consensus saw a 3.0 percent figure.
Leon and Hsieh were referring to President Joko Widodo’s move in November 2014 to raise subsidized fuel prices by an average 33.6 percent as he sought to shift subsidy spending to productive sectors. By December, as effects of the increase diminished, inflation cooled significantly.
Looking forward, according to Ho Leong and Hsieh, with the government lowering the price of low-octane Premium gasoline to Rp 7,150 (51 US cents) per liter from Rp 7,400 and the price of diesel to Rp 5,950 per liter from Rp 6,700 that will be effective from Jan. 5, Barclays lowered its 2016 inflation forecast by 20 basis points to 4.2 percent year-on-year.
“With inflation likely to fall back within Bank Indonesia’s target range of 3 percent-5 percent throughout 2016, we believe it opens up room for further easing,” said the two Barclays analysts.
“This is also consistent with BI’s comment on Dec. 17 when the central bank said room for loosening remained open. We maintain our forecast and look for two-25 basis points rate cuts next year – one in the first quarter and another in the second quarter,” they said.
Other analysts supported the hypothesis of more room for Indonesia’s central bank to cut its key rate.
Wellian Wiranto, an economist at OCBC in Singapore, said Bank Indonesia is likely to cut its key rate to 7.0 percent and keep it that level for the rest of the year, as it also seeks to maintain stability for the rupiah that may be threatened by possible capital outflow after the US Federal Reserves raised its key rate.
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