Indonesian headline inflation accelerates further in May, BI likely to cut rates by 50 bps in 2019

Indonesian headline inflation accelerated further in May, driven by food inflation. On a year-on-year basis, the consumer price inflation rose to 3.32 percent, the highest reading in 13 months. The acceleration was led by food prices, which rose 4.14 percent on a year-on-year basis, as compared to 2.29 percent in April. Transport and clothing inflation also accelerated, while housing, clothing and healthcare inflation slowed down.

On a sequential basis, the headline inflation rose by 0.68 percent after a rise of 0.44 percent rise seen in the prior month. Food prices rose 2.02 percent, followed by transport and clothing which rose 0.54 percent and 0.45 percent, respectively. The sequential rise in housing and healthcare prices eased, while education prices were widely unchanged.

Core inflation, which strips volatile food and government-controlled prices, rose as well, but to a smaller degree. The core inflation came in at 0.27 percent sequentially and 3.1 percent year-on-year.

The inflation data continues to be within the central bank’s 2.5 percent to 4.5 percent target band, and is not a hurdle to monetary policy easing.

“Indeed, BI today reiterated that inflation is seen “low and manageable” and that it will “calibrate policy to support economic growth”. The US Fed’s recent signal that the door to rate cuts is open has increased the scope for BI to lower its policy rate. We see room for at least 50bps worth of rate cuts this year, with the first 25bps coming as soon as its meeting next week, provided that IDR stability is maintained”, said ANZ in a research report.