Indonesia's CPI inflation has eased but does not necessarily mean lower interest rates

Indonesia's CPI inflation is likely to come in at 3.3% (YoY) in December. It was highly distorted by base effects, due to the subsidized fuel price hike back in Dec14. Going forward, CPI inflation may inch gradually higher towards 5.0% closer to mid-2016. And CPI inflation is expected to average 5.7% in 2016. Bank Indonesia (BI) is likely to be comfortable with CPI inflation staying below 5% for now. Additionally, core inflation might have also eased to a low 4% in December and unlikely to breach past the 5% print anytime soon. 

"While we continue to see upside risks to our inflation projections this year, it is interesting to see if BI may respond to the rather gentle inflation trajectory in 1Q16", says 

As long as the rupiah remains stable, there is a good chance of further policy loosening by the central bank. BI has lowered its reserve requirement ratio in Nov15 to help boost GDP growth, and further easing on this front looks likely. It is important to note, however, that BI remains focused on managing volatility of the rupiah. Despite the rupiah recouping some grounds at the end of 2015, the unit remains vulnerable due to Indonesia's external financing concerns. At this juncture, BI is not expected to trigger-happy with its policy rate adjustment.