In February 2015, Indonesia’s annual inflation pace is forecast to ease to 6.70 percent (y/y) from 6.96 percent (y/y) in the first month of the year. Late last year, inflation surged as the Indonesian government introduced higher subsidized fuel prices (in November 2014). However, the government was able to reform the subsidized fuel policy in January 2015 (resulting in sharply lower fuel prices) amid low global oil prices. Easing inflationary pressures made the central bank of Indonesia (Bank Indonesia) decide to lower its key interest rate (BI rate) by 25 basis points to 7.50 percent at the Board of Governor’s Meeting on 17 February. Speculation emerged that the central bank may cut its BI rate further this year as the negative impact (capital outflows) caused by the (looming) higher US interest rate are offset by monetary stimulus in the European Union (EU) and Japan (expected to result in capital inflows). Meanwhile, a weaker rupiah means that the country’s trade balance (and current account balance) is to improve. Therefore, Bank Indonesia is not expected to intervene too much in the market to support the currency. The rupiah is one of the weakest performers (against the US dollar) among Asian emerging market currencies in 2015, depreciating about four percent towards the IDR 13,000 per US dollar level (a level last seen after the Asian Financial Crisis in the late 1990s).

Indonesian Rupiah versus US dollar:

| Source: Bank Indonesia

Although most analysts believe that Indonesian inflation has eased in February (prices of chili, meat and onions have eased), there are some voices that claim accelerated inflation is possible, not only because of the steep rise in rice prices but also because the depreciating rupiah exchange rate (against the US dollar) causes imported inflation as imported goods become more expensive.

Besides distribution issues and this year’s late harvest, soaring rice prices are also blamed on the change in structure of Bulog (the state agency that manages Raskin program) which now distributes its rice through mediation of third-party traders.

Statistics Indonesia (BPS) is scheduled to release the official February inflation figure on Monday (02/03).

Inflation in Indonesia:

Month  Monthly Growth
 Monthly Growth
 Monthly Growth
January          1.03%          1.07%         -0.24%
February          0.75%          0.26%
March          0.63%          0.08%
April         -0.10%         -0.02%
May         -0.03%          0.16%
June          1.03%          0.43%
July          3.29%          0.93%
August          1.12%          0.47%
September         -0.35%          0.27%
October          0.09%          0.47%
November          0.12%          1.50%
December          0.55%          2.46%
Total          8.38%          8.36%         -0.24%

Source: Statistics Indonesia (BPS)

Inflation of Indonesia 2008-2014:

     2008    2009    2010    2011    2012    2013    2014
(annual percent change)
    9.8     4.8     5.1     5.4     4.3     8.4     8.4

Source: World Bank