Indonesian headline inflation eases in June, FX volatility to remain main focus of monetary policy in months ahead

Indonesian headline inflation and core inflation eased in June. In spite of the moderation on a year-on-year basis, monthly gains in headline prices came in higher than market expectations. On a sequential basis, headline inflation accelerated to 0.59 percent from May’s 0.21 percent, driven mostly by gains in food items. The upward adjustment in retail fuel prices also bumped up transport costs.

Core inflation eased slightly. In the meantime, administered inflation moderated to 2.88 percent year-on-year from 3.61 percent year-on-year in May, marking the sixth consecutive month of moderation. The higher than expected reading notwithstanding, headline inflation has now stayed in the lower half of Bank Indonesia’s target inflation range of 2.5 percent to 4.5 percent each month this year.

The inflation trajectory re-emphasizes the fact that the central bank’s decision to increase the policy rate by a cumulative 100 basis points is aimed at stemming IDR weakness.

“FX volatility will continue to remain the main focus of monetary policy in the coming months, in our view”, stated ANZ in a research report.

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