Analysis: BI rate may stay on tamed inflation

April’s Consumer Price Index (CPI) rose to 0.21 percent m-m from March’s level of 0.07 percent. This result was slightly higher than our estimate of 0.18 percent but in line with consensus’ 0.20 percent. The monthly CPI also translated to higher April’s CPI of 4.50 percent y-y compared to previous level of 3.97 percent (figure 1).

We note that several commodity prices namely chilies, onions, sugar, cooking oil, processed foods, cigarettes, concrete steel, rentals and airlines tariffs were the main drivers for April’s inflation. On the flip side, lower gold price in April allowed core inflation to slightly ease to 4.23 percent y-y compared to previous level of 4.25 percent.

Going forward, inflationary pressure will hinge on the government’s subsidy policy. Recently we expect 6-month average price of Indonesian Crude Oil Price (ICP) would reach US$119 per barrels per day (bbl) in April (figure 2), almost breaching the upper limit of the government’s ICP assumption and applying pressure on the 2012 revised state budget.

If the government were not to raise subsidized fuel price in 2Q12, ICP has to decline to US$117.2/bbl on average in May-June, otherwise, the upper limit would be broken. This will lead to policy uncertainties particularly if the government does not have the political will to implement a bold subsidy adjustment. However, the government could use fiscal buffer of around Rp 62.4 trillion (US$6.80 billion) and some spending cuts on unnecessary budget items worth Rp 19 trillion to support the need for higher fuel subsidy, maintaining a state budget deficit below 3 percent of GDP.

Meanwhile, to maintain subsidized fuel consumption below 40 million kiloliters, the government plans to prohibit private cars with engine capacities larger than 1,500 cc from using subsidized fuel starting in Java and Bali in the second half of 2012. We expect the impact of the government’s policy would only add 0.4 percent to our 2012 inflation target of 5.2 percent, suggesting inflation should remain benign despite fuel price uncertainties. At this stage, we expect the central bank to maintain BI rate at 5.75 percent on its next Board of Governors meeting on 10 May. Furthermore, we also expect the benchmark rate to remain unaltered throughout 2012 (figure 3).


The writer is an economist at PT Bahana Securities.