High inflationary pressures in the first two weeks of July were caused by troubled distribution networks (due to the large flow of travelers during the Idul Fitri holiday) as well as rising air transport tariffs. Due to severe traffic congestion at key roads on Java the supply of certain commodities was disrupted, hence causing rising prices. For example, prices of chili rose up to (a whopping) 32 percent in Jakarta in the first week of July. However, in the second half of July there have (so far) not been any reports about troubled distribution networks in Indonesia.

Meanwhile, Mohammad Faisal, Director of Research at the Center of Reform in Economics (Core), expects Indonesia's inflation rate to reach about 3 percent year-on-year (y/y) by the end of 2016, well withing the central bank's target range of 3 - 5 percent (y/y). As inflation is one of the key indicators that is used by the central bank to determine its monetary policy stance, Faisal also believes that there is plenty of room for the benchmark interest rate (BI rate) to decline to 5 percent (he suggests a two percent difference between annual inflation and the key interest rate). In the latest policy meeting Bank Indonesia kept the BI rate at 6.50 percent.

However, the most important matter - according to Faisal - is to see the impact of monetary easing on the real sector. This has been problematic so far in Indonesia. Despite the central bank having cut its BI rate four times already this year, by 25 basis points each, borrowing costs have difficulty to fall accordingly.

In the next policy meeting - August 2016 - Bank Indonesia is set to adopt the 7-day reverse repurchase rate as the country's new benchmark rate because it is considered to better transmit monetary policy to the market hence influencing borrowing costs and market liquidity more effectively. Indonesia's 7-day reverse repurchase rate was left unchanged at 5.25 percent at Bank Indonesia's July policy meeting.

Inflation in Indonesia:

Month  Monthly Growth
 Monthly Growth
 Monthly Growth
 Monthly Growth
January          1.03%          1.07%         -0.24%          0.51%
February          0.75%          0.26%         -0.36%         -0.09%
March          0.63%          0.08%          0.17%          0.19%
April         -0.10%         -0.02%          0.36%         -0.45%
May         -0.03%          0.16%          0.50%          0.24%
June          1.03%          0.43%          0.54%          0.66%
July          3.29%          0.93%          0.93%
August          1.12%          0.47%          0.39%
September         -0.35%          0.27%         -0.05%
October          0.09%          0.47%         -0.08%
November          0.12%          1.50%          0.21%
December          0.55%          2.46%          0.96%
Total          8.38%          8.36%          3.35%

Source: Statistics Indonesia (BPS)

Inflation in Indonesia and Central Bank Target 2008-2016:

   2008  2009  2010  2011  2012  2013  2014  2015  2016
(annual % change)
  9.8   4.8   5.1   5.4   4.3   8.4   8.4   3.4  
Bank Indonesia Target
(annual % change)
  5.0   4.5   5.0   5.0   4.5   4.5   4.5   4.0   4.0

Source: Bank Indonesia

Meanwhile, the Indonesian government remains optimistic that Southeast Asia's largest economy will grow 5.3 percent (y/y) in the second half of 2016, primarily supported by rising government spending on infrastructure development. Indonesian Finance Minister Bambang Brodjonegoro expects to see a wave of new private investment coming on the back of rising public investment, while the repatriation of funds through the tax amnesty program can be regarded the additional icing on the cake. If indeed the economy of Indonesia can grow by 5.3 percent (y/y) in the second half of 2016, then it would imply that the Indonesian economy will expand by 5.2 percent (y/y) in full-year 2016.

Brodjonegoro added that stable and relatively low inflation in Indonesia - so far this year - will manage to boost people's purchasing power and therefore rising household consumption can also form a pillar of support for the economy in the last half of the year.

Indonesia's Quarterly GDP Growth 2009-2016 (annual % change):

Year    Quarter I
   Quarter II    Quarter III    Quarter IV    Full-Year
2016        4.92
2015        4.73        4.67         4.74         5.04         4.8
2014        5.14        5.03         4.92         5.01         5.0
2013        6.03        5.81         5.62         5.72         5.6
2012        6.29        6.36         6.17         6.11         6.0
2011        6.45        6.52         6.49         6.50         6.4
2010        5.99        6.29         5.81         6.81         6.2
2009        4.60         4.37         4.31         4.58         4.6

Source: Statistics Indonesia (BPS)

Bank Indonesia stated that it expects the current account deficit to reach 2.1 percent of gross domestic product (GDP) in the second quarter of 2016, more-or-less the same as the 2.14 percent current account deficit in the first quarter of the year. Regarding Indonesia's full-year 2016 current account deficit, Bank Indonesia has its target at 2.2 percent of GDP.

Bank Indonesia official Juda Agung added that the central bank is comfortable with the current rupiah exchange rate around IDR 13,100 per US dollar, as this is considered to be in line with its fundamentals. Bank Indonesia's benchmark rupiah rate (the Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.25 percent to IDR 13,135 per US dollar on Monday (25/07).

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia