Inflation Update Indonesia: Falling Below Central Bank's 2015 Target

Juda Agung, Executive Director of the Economic and Monetary Policy Department at Bank Indonesia, said the central bank estimates that inflation in November will reach 0.13 percent (m/m), while the pace in December will be higher (projected at 0.50 percent m/m) due to some inflationary pressures caused by the Christmas and New Year celebrations.

Due to the El Nino weather phenomenon, which brings dry weather to Southeast Asia (hence disturbing harvests), there are some concerns about rice inflation in Indonesia. However, Agung stated that rice imports from Vietnam should be enough to safeguard stable prices.

Indonesia's inflation rate stood at 6.25 percent (y/y) in October 2015. However, the rate is expected to ease markedly in the last two months of 2015 as the impact of last year's subsidized fuel price hike vanishes. On 17 November 2014, Indonesian President Joko Widodo announced that prices of subsidized fuels (gasoline and diesel) were to be raised by IDR 2,000 (approx. USD $0.16). Gasoline (premium) was raised from IDR 6,500 to IDR 8,500 per liter, while diesel was raised from IDR 5,500 to IDR 7,500 per liter. As a result, Indonesia's monthly inflation rose 1.50 percent in November 2014 and 2.46 percent in December 2014, leading to a 8.4 percent inflation pace in full-year 2014 (in January 2015, the government basically scrapped the gasoline subsidy program, while introducing a fixed IDR 1,000 per liter subsidy for diesel).

Inflation in Indonesia and Central Bank Target 2008-2015:

	2008	2009	2010	2011	2012	2013	2014	2015
Inflation (annual percent change)	9.8	4.8	5.1	5.4	4.3	8.4	8.4	2.8¹
Bank Indonesia Target (annual percent change)	5.0	4.5	5.0	5.0	4.5	4.5	4.5	4.0

^{¹ projection Bank Indonesia
Sources: World Bank and Bank Indonesia}

Inflation in Indonesia:

Month	Monthly Growth           2013	Monthly Growth           2014	Monthly Growth           2015
January	1.03%	1.07%	-0.24%
February	0.75%	0.26%	-0.36%
March	0.63%	0.08%	0.17%
April	-0.10%	-0.02%	0.36%
May	-0.03%	0.16%	0.50%
June	1.03%	0.43%	0.54%
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%
December	0.55%	2.46%
Total	8.38%	8.36%	2.16%

^{Source: Statistics Indonesia (BPS)}

Despite low inflation, the central bank of Indonesia is not expected to cut its benchmark interest rate (BI rate) as there are serious signs that the US Federal Reserve will raise US interest rates in December 2015, implying Indonesia may be plagued again by capital outflows. A higher BI rate makes Indonesian assets a bit more attractive, hence it could limit the amount of outflows. So far this year, the Indonesian rupiah has already depreciated over 10 percent against the US dollar.

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia

Since February 2015 Bank Indonesia has maintained its BI rate at a relatively high 7.50 percent. However, at its latest Board of Governor's Meeting, Bank Indonesia did ease monetary policy as it lowered the primary minimum statutory reserves (Giro Wajib Minimum Primer) from 8.00 percent to 7.50 percent (effective per 1 December 2015), providing more room for local banks to lend thus boosting economic activity.

Next year, the government plans to cut subsidies for electricity as well as gas. This is expected to cause some inflationary pressure in 2016.

Further Reading:

• Overview & Analysis of Inflation in Indonesia

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Lex McGuir | 24 November 2015 05:15

The Indonesian government is giving poor people money. Now millions are lined up outside of government offices. Why are the governments of other countries so stingy? And inflation is down so even better!!