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Deflation paves way for rate cut
Indonesia recorded deflation in January as the decline in fuel prices dragged down food and transportation costs further than expected, creating room for the central bank to cut interest rates and loosen its tight monetary policy
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Indonesia recorded deflation in January as the decline in fuel prices dragged down food and transportation costs further than expected, creating room for the central bank to cut interest rates and loosen its tight monetary policy.
The Central Statistics Agency (BPS) announced on Monday that the month-to-month consumer price index (CPI) stood at negative 0.24 percent in January, with the decline in prices attributed to President Joko 'Jokowi' Widodo's move to lower the price of Premium gasoline, diesel fuel and liquefied petroleum gas (LPG) earlier in the month.
Meanwhile, year-on-year inflation stood at 6.96 percent ' lower than the market consensus of 7.5 percent.
'Deflation dynamics have begun and we expect a more pronounced slowing of inflation through February,' ANZ Bank economists Daniel Wilson and Glenn Maguire wrote in a note released after the announcement.
'We continue to hold the view that inflation is set to decline sharply in coming quarters, creating a window of opportunity for Bank Indonesia [BI] to ease policy in the second half of this year,' they wrote.
Factors contributing to deflation included several factors under the control of the government, such as air and land transportation costs. Some volatile food commodities, such as chili and cayenne, also saw deflation, thanks to the harvest season.
On a month-to-month basis, deflation on government-controlled commodities stood at 0.73 percent, compared to a 0.12 percent rise in volatile food prices and a 0.37 percent rise in core inflation.
As inflation is likely to ease further, there have been louder calls among economists and government officials for the Indonesian central bank to cut the benchmark BI rate and loosen monetary policy.
Vice President Jusuf Kalla, for example, said he had repeatedly urged BI to ease its rate to help boost the country's competitiveness and propel growth.
'It's about time for BI to slash its interest rate in order for us to achieve 6 percent growth,' said Kalla on Jan. 28.
BI executives have signaled little interest in loosening monetary policy in the near future, citing the risks of capital outflows due to the imminent interest-rate hike in the US.
However, regional central banks have dismissed such fears, with monetary authorities from Singapore to India already cutting interest rates this year with little impact on capital flows.
Those cuts led Asian Development Bank (ADB) president Takehiko Nakao to declare that risks from the US rate increase appeared to be 'overblown'.
At present, the benchmark BI rate stands at 7.75 percent, the highest level since March 2009.
Credit Suisse economist Santitarn Sathirathai noted that BI may surprise investors, predicting the central bank could cut the benchmark rate by 50 basis points.
'With growth likely to remain sluggish over the next few quarters, the central bank is likely to take the opportunity to ease [its interest rate] to support economic recovery,' he said.
'With year-on-year inflation falling faster than expected, the real interest rate in Indonesia will likely be healthier than most observers think,' he added.
Nevertheless, BI spokesperson Peter Jacobs stated Monday that the central bank would stay on the tight-bias monetary policy course to safeguard the stability of the rupiah against the strengthening trend of the US dollar.
Data from the Jakarta Interbank Spot Dollar Rate (JISDOR) showed the rupiah had depreciated by 2.1 percent year-to-date, trading at 12,700 per dollar on Monday after falling 1.7 percent in 2014.
Any future changes to the BI rate, Peter said, would consider factors other than inflation, including currency risks related to uncertainties in the global economy.
He said this was because the sluggish economic recovery in China and Europe would limit growth worldwide this year, with the US dollar likely to remain the preferred asset, he explained.
BI is slated to hold a meeting on Feb. 17 to determine whether to maintain or lower the current rate.
