The latest Consumer Confidence Survey released by Indonesia’s central bank indicated that Indonesian consumers were more optimistic in January 2015 (compared to the previous month) on the back of recent fuel price cuts. The index, based on a total of 4,600 households across 18 major Indonesian cities, climbed to 120.2 points in January, up from 116.5 in the preceding month (a score above 100 signals consumer optimism). In December the index had declined due to higher administered fuel prices.
In November 2014, the Joko Widodo administration decided to raise prices of subsidized low-octane gasoline and diesel by an average of over 30 percent in an attempt to relieve pressures on the government budget deficit and to free up funds for structural economic and social development. However, due to sharply declining global oil prices, the administration quickly scrapped subsidies for low-octane gasoline, introduced a fixed IDR 1,000 per liter subsidy for diesel, and reduced subsidized fuel prices in January (as these had become more expensive than the real market prices). As such, the country’s new fuel subsidy scheme is much more based on a market-based price mechanism. The government will evaluate and set prices of gasoline and diesel each month, thus floating in line with global oil prices (while also taking into account rupiah exchange rate fluctuation) and reduce volatility risks.
Bank Indonesia’s latest Consumer Confidence Index signals that Indonesian consumers grew more optimistic about their economic conditions (such as their incomes) over the next six months. Consumers also expect easing price pressures in April 2015 due to lower fuel prices. Meanwhile, the index of durable goods purchases rose to 108.2 points from 106.4 points in December 2014. Besides lower transportation costs having a moderating impact on inflation, consumers are also more optimistic about the Indonesian economy as the Joko Widodo administration is keen to develop the country’s infrastructure (which will bear a multiplier effect on the economy).
Indonesia’s central bank kept its key interest rate (BI rate) at 7.75 percent at its latest Board of Governors’ Meeting in January as inflation is on an easing trend (6.96 percent year-on-year in January 2015 from 8.36 percent in the previous month), the current account deficit has probably eased in 2014, and the current relatively high BI rate may limit capital outflows ahead of a looming US interest rate hike later this year.