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Headline inflation in Indonesia is expected to average 4.6 percent this year largely due to the phased removal of electricity tariff subsidies. Fuel prices, which have yet to rise, could also face further hikes if global oil prices remain on an uptrend.
Bank Indonesia (BI) has forewarned that inflation control will be more challenging in 2017 with the headline CPI likely to rise above 4 percent from 3.5 percent in 2016. Based on the forecast of the monthly inflation trajectory, Indonesia’s headline inflation is likely to periodically test the upper bound of BI’s inflation target in H2 2017. The official forecast corridor of 4 percent +/- 1 percent is, however, likely to be respected for the year as a whole, ANZ reported in its latest publication.
This evolving inflation trajectory will warrant a neutral monetary policy stance. The scope for further easing is diminished, though at the same time there is also limited pressure to hike rates.
"We maintain our view that BI will remain on hold throughout 2017, keeping the 7-day reverse repo rate at 4.75 percent," the report said.
