Indonesia’s headline inflation slows in August, strengthens case for additional rate cut

The headline inflation of Indonesia slowed in August to the weakest in nearly seven years. It dropped to lower than Bank Indonesia’s target rate, strengthening the case for an additional rate cut. The nation’s year-on-year headline inflation eased from July’s 3.21 percent to 2.79 percent in August. On a month-on-month basis, prices dropped 0.02 percent, according to Statistics Indonesia.

The subdued result if August is mostly because of the normalization in transport and food prices. This more than countered higher education costs that usually rise at the beginning of the school year in August, said ANZ in a research note.

The Indonesian central bank is dovish. It has cut its growth projection range for 2016 to 4.9-5.3 percent y/y, as compared with the earlier range of 5.0-5.4 percent y/y. This was because of the anticipated slower public spending in the second half of 2016.

An easing bias from the central bank continues given the weak domestic conditions. Subdued inflation combined with stability in exchange rates and current account deficits, have made policy space for rate reductions. The extent of easing would depend on the size of tax amnesty inflows.

“We expect another 25bps cut in the new reference rate (7-Day Reverse Repo Rate) to 5.00 percent at the September 22 policy meeting, which follows on the heels of the September FOMC decision”, added ANZ.