With food prices under control amid the harvest season, Indonesia's April inflation rate should be mild. Prices of rice, a crucial commodity in Indonesia, were on the decline over the past couple of weeks. When prices of rice slide, it also tends to have an easing effect on other food product prices.

However, another round of higher electricity tariffs (conducted in March for 900 VA households as the government is eager to curtail spending on energy subsidies) will bring a new round of inflationary pressures to Southeast Asia's largest economy (as it did in the first month of the year). The government planned three electricity tariff hikes this year (January, March and May).

Meanwhile, considering it won't be long before the Ramadan month starts, the government is advised to carefully monitor the food supply-side, particularly items such as rice, chili, sugar, cooking oil, meat, and eggs. Although the Ramadan month is the holy fasting month for Muslims, the period always triggers rising spending on food items because people tend to gather for food parties in the evening (and morning). This in fact causes a peak of consumer spending on food items, and thus brings inflationary pressures (this is aggravated by forces that deliberately curtail the supply-side in order to benefit from higher prices).

In March 2017 Indonesia's annual headline inflation rate was recorded at 3.61 percent (y/y), a modest inflation rate for Indonesian standards but slightly higher compared to full-year 2016 inflation at 3.02 percent. Bank Indonesia still maintains its FY-2017 inflation target in the range of 3-5 percent.

Inflation & Bank Indonesia's Interest Rate Regime

With inflationary pressures originating from the electricity rate hikes (in May 2017 there is another increase) as well as the Ramadan and subsequent Idul Fitri celebrations, the central bank of Indonesia has few room to cut its interest rate regime in the next couple of months. Moreover, it will need to guard the rupiah exchange rate, a rate that is highly vulnerable to external factors.

Considering there is plenty of global uncertainty (originating from (1) US trade policies and other political decisions made by the Donald Trump administration, (2) looming further monetary tightening conducted by the US Federal Reserve, (3) geopolitical issues in Korea and Syria, (4) stability of the European Union, and (5) economic rebalancing of China), there can suddenly emerge major pressures on the rupiah if there occur any unexpected shocks related to aforementioned factors. A lower interest rate regime make the rupiah more vulnerable to such external issues.

Although a lower interest rate environment should lead to accelerated economic growth, it is worth pointing out that, for Indonesian standards, the nation's benchmark interest rate is actually at a low level currently (at 4.75 percent) and thus should be sufficient to boost consumption and credit growth. We expect Bank Indonesia will not adjust its key interest rates at all in the remainder of 2017.

Inflation in Indonesia:

Month M/M Growth
M/M Growth
M/M Growth
M/M Growth
M/M Growth
January      1.03%      1.07%     -0.24%      0.51%      0.97%
February      0.75%      0.26%     -0.36%     -0.09%      0.23%
March      0.63%      0.08%      0.17%      0.19%     -0.02%
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%      0.69%
August      1.12%      0.47%      0.39%     -0.02%
September     -0.35%      0.27%     -0.05%      0.22%
October      0.09%      0.47%     -0.08%      0.14%
November      0.12%      1.50%      0.21%      0.47%
December      0.55%      2.46%      0.96%      0.42%
Total      8.38%      8.36%      3.35%      3.02%

Source: Statistics Indonesia (BPS)

Inflation in Indonesia and Central Bank (BI) 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  3.0
BI Target
(annual % change)
 5.0  4.5  5.0  5.0  4.5  4.5  4.5  4.0  4.0

Source: Bank Indonesia