According to the World Bank the economy of Indonesia will continue to accelerate in 2017 supported by strengthening global economic growth, overall rising commodity prices (meaning investment and export performance should improve), the nation's low current account deficit, low inflation, and strong fundamentals of the Indonesian economy. These circumstances should boost Indonesia's gross domestic product (GDP) growth to 5.2 percent year-on-year (y/y) in 2017 (from 5.0 percent in the preceding year).

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In line with expectations, Indonesia's inflation rate accelerated in February 2017, particularly due to higher prices in the category "housing, water, electricity, gas and fuel". On Tuesday (01/03) Statistics Indonesia announced that Indonesia's annual headline inflation rose to 3.83 percent (y/y), up from 3.49 percent (y/y) in the preceding month. On a monthly basis, Indonesian inflation was recorded at 0.23 percent (m/m), the highest monthly February inflation figure since 2014.

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Bank Indonesia, the central bank of Indonesia, is concerned that the ongoing flooding that occurs in several regions of the country will give rise to inflationary pressures as some distribution channels are blocked. Besides logistics issues, severe rainfall can disturb harvests hence impacting negatively on the supply-side. In several parts of Indonesia, including the capital city of Jakarta and the northern part of Central Java, there are reports of major floods.

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On 5 February 2017, Indonesia Investments released the latest edition of its newsletter. This free newsletter, which is sent to our subscribers once per week, contains the most important news stories from Indonesia that have been reported on our website over the last seven days. Most of the topics involve political, social and economy-related topics such the Jakarta gubernatorial election, Indonesia's GDP growth, inflation, manufacturing activity, the investment climate, palm oil, coal, and much more.

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The International Monetary Fund (IMF) is optimistic about economic growth of Indonesia in the foreseeable future. In its latest report the Washington-based institution says Indonesia's solid economic policies and increased household consumption support strong growth. The stronger rupiah and low inflation have caused people's purchasing power to strengthen. This is a major positive boost for the economy as household consumption accounts for more than 55 percent of total economic growth in Southeast Asia's largest economy.

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We already expected Indonesia's inflation rate would be high in January 2017 due to higher food prices as well as higher administered prices (electricity tariffs, fuel prices and vehicle registration fees). However, inflation realization in the first month of 2017 exceeded our expectations. Indonesia's statistics bureau (BPS) announced around noon on Tuesday (01/02) that the nation's monthly inflation accelerated to 0.97 percent (m/m) in January 2017, while annual (headline) inflation rose to 3.49 percent (y/y).

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Indonesia's consumer price index is expected to rise in January 2017 amid higher food prices and higher government administered prices. Indonesian inflation in the first month of 2017 is estimated in the range of 0.60 - 0.70 percent month-on-month (m/m). Accelerating inflation in Southeast Asia's largest economy would imply that Indonesia's central bank (Bank Indonesia) has limited room to ease its monetary policy (by cutting the benchmark interest rate).

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Eric Sugandi, Chief Economist at SKHA Institute for Global Competitiveness (SIGC), believes household consumption will remain the main engine of economic growth in Indonesia in 2017, followed by the other engines, namely direct investment and government spending. Regarding household consumption, Sugandi says the middle class contributes significantly to economic growth of Southeast Asia's largest economy due to their robust consumption. Traditionally, household consumption accounts for between 55 and 58 percent of Indonesia's gross domestic product (GDP).

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Indonesia's Deposit Insurance Agency (LPS) expects Indonesian inflation to reach 4.7 percent year-on-year (y/y) in full-year 2017, just within the central bank's 3 - 5 percent (y/y) inflation target. Didiek Madiyono, Executive Director of the LPS, said administered price adjustments will be the primary reason why the inflation rate of Indonesia will accelerate from 3.0 percent (y/y) in 2016 to 4.7 percent (y/y) in 2017. Administered prices are those prices that are set by the government. Usually when the government changes its subsidy policies, it needs to adjust certain prices.

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Most analysts and government officials see Indonesian inflation accelerating this year after a mild 2016 in which Indonesia's consumer price index rose by 3.02 percent year-on-year (y/y) only. Indonesian Chief Economics Minister Darmin Nasution said low inflation in 2016 was primarily caused by low administered price growth (in a couple of months administered prices in fact fell last year) as well as controlled food prices. He added, however, that food prices have been rather volatile and are expected to remain volatile in 2017.

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Rising commodity prices are good for the Indonesian economy because the country is one of the world's biggest commodity exporters. However, rising commodity prices will also make it more difficult for the government to keep inflation within its target range of 2.5 - 4.5 percent year-on-year (y/y) in 2018.

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Bank Indonesia is content seeing Indonesia's inflation pace at a rather mild rate of 0.22 percent month-on-month (m/m) in July 2017. Dody Budi Waluyo, Executive Director of Economic and Monetary Policy at the central bank, said low and stable inflation is a positive asset for the economy as it supports the rupiah exchange rate as well as the investment climate and safeguards people's purchasing power.

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The central bank of Indonesia (Bank Indonesia) maintained its benchmark interest rate - the 7-day reverse repurchase rate - at 4.75 percent at the policy meeting on 17-18 May 2017, a decision that is in line with analysts' forecasts. Bank Indonesia said the decision is consistent with its efforts to maintain macroeconomic and financial system stability "by driving the domestic economic recovery process", while continue to monitor external threats stemming from US policy directions and geopolitical conditions, specifically in the Korea Peninsula, as well as domestic threats stemming from inflationary pressures and ongoing consolidation in the banking and corporate sectors.

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It is highly unlikely to see the continuation of deflation in April. Last month (March 2017) Indonesia recorded 0.02 percent of deflation, primarily on the back of easing food prices amid the big harvest season. This harvest season will continue into April and therefore we expect few (to none) inflationary pressures stemming from food products. However, administered price adjustments (specifically another round of higher electricity tariffs in March) will impact of April's inflation figure, while consumer prices may also start to feel the impact of the approaching Ramadan month.

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The central bank of Indonesia (Bank Indonesia) kept its benchmark interest rate (seven-day reverse repo rate) at 4.75 percent at the April policy meeting (19-20 April 2017), while its deposit facility rate and lending facility rate stayed at 4.00 percent and 5.50 percent, respectively. Bank Indonesia considers the current interest rate environment appropriate to face global uncertainties as well as rising inflationary pressures at home.

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The central bank of Indonesia (Bank Indonesia) said it carefully monitors the impact of higher electricity tariffs on the nation's inflation pace in March 2017. This month the government implemented the second phase of its gradual electricity tariff increase program for 900-VA household customers. Indonesia's state-owned electricity company Perusahaan Listrik Negara (PLN) decided to raise the electricity price for 900-VA households three times this year in order to cut energy subsidies and ensure that these subsidies are indeed channeled to the right people.

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The Bank of Indonesia recently resorted to a sudden cut in interest rate (by 25 bps to 4.75 percent) at its 20th October 2016 meeting. This followed a 25 bps reduction in September and thus this is the sixth time this year that the Indonesian central bank has elected to loosen monetary policy.

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An International Monetary Fund (IMF) team, led by Luis E. Breuer, visited Indonesia between 7 and 18 November 2016 to conduct the annual Article IV Consultation. The IMF team exchanged views with Indonesian government officials, Indonesia's central bank (Bank Indonesia), and other public agencies, as well as representatives of the private sector, academics, and students on recent economic and financial market developments and the near-to-medium-term economic outlook.

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The central bank of Indonesia (Bank Indonesia) has become slightly less optimistic about Indonesia's economic growth in the third quarter of 2016. Bank Indonesia revised down its growth projection to below the 5 percent (y/y) mark for Q3-2016 (from an earlier forecast of 5.2 percent). However, the lender of last resort still expects to see a better performance compared to the 4.73 percent (y/y) pace posted in Q3-2015. Meanwhile, low inflation and a strong rupiah could result in another interest rate cut in Southeast Asia's largest economy.

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On September 22, 2016, the central bank of Indonesia (Bank Indonesia) decided to cut its BI seven-day repo rate from 5.25 percent to 5.00 percent, and this has changed parts of the long-term outlook for investors. Bank Indonesia also reduced its lending rate to 5.75 percent (from previous 5.50 percent), and the deposit rate to 4.50 percent (from previous 4.75 percent previously). This is significant because it shows that lending rates and interest rates have dropped to multi-year lows with the current policy changes.

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