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Jakarta Post

Analysis: May CPI: Closing the window for lower rates

  • Harry Su

    The Jakarta Post

Jakarta   /   Thu, June 4, 2015   /  09:20 am
Analysis: May CPI: Closing the window for lower rates

A higher-than-expected consumer price index (CPI) of 0.5 percent month-on-month (mom) in May (April: 0.36 percent) on higher staple foods prices in the lead-up to the fasting month, increasing volatile prices 1.52 percent on a mom basis (April: -0.91 percent), is likely to have closed the window for the central bank to lower its benchmark interest rate for the rest of the year.

Prices for other items also rose, including for clothing (+0.23 percent mom), health-related products (+0.34 percent mom) and housing (+0.2 percent mom) (see table 1). On a year-on year (yoy) basis, May inflation was up 7.15 percent, above the street estimate of 7.01 percent yoy, and higher compared to the April level of 6.79 percent yoy (table 2). Thus, the CPI in the first five months of this year is now in a positive inflation territory at 0.42 percent as compared to 1.55 percent in the first five months of last year. Albeit still low, it was mainly helped by subdued commodity prices during the March and April harvesting period.

Looking at its components, May'€™s core CPI rose 0.23 percent mom, but was flattish at 5.04 percent yoy (April: 5.04 percent), in line with a consensus estimate of 5.06 percent y-y with stability suggesting subdued commodity demand. However, given the upcoming fasting month, core inflation is likely to rise, particularly if the distribution of goods are not handled properly.

Although no fuel price hike is planned for June, we expect this month'€™s CPI to remain in inflation territory as the government has announced an electricity tariff hike for non-subsidized categories this month. Additionally, inflationary pressures should arise from higher demand for food, clothing and transportation because of the seasonal effects of Ramadhan this month and Idul Fitri in July.

However, we believe inflation should remain manageable in the future, assuming proper governmental management of prices of several main staple foods, such as rice, eggs and edible oils.

Table 3 shows the Bank Indonesia (BI) rate being lowered by 25 basis points in the second quarter of 2015 to 7.25 percent from the current 7.5 percent, as we had estimated. Going forward, while we still think that the central bank needs to further cut its benchmark rate. We believe there is a small window for this in the near term to support the country'€™s economic growth target as domestically we are entering high-inflation months on the back of the Ramadhan and Idul Fitri festivities.

From an external perspective, BI, post Idul Fitri, is likely to be held hostage by the US Federal Reserve (Fed) rate hike, which is likely to occur in the later part of this year. Additionally, we see that BI continues to be concerned about the weakness of the rupiah and the country'€™s current account deficit, suggesting limited room for lower interest rates ahead.

The writer is senior associate director/head of research at Bahana Securities.

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