Indonesia Macro Update - BI7DRR 03 Apr 2023

In line with our estimates but lower than consensus', Mar'23 headline (consumer price index - CPI) inflation eased to 0.18% mom or 4.97% yoy (Cons': 0.29% mom or 5.20% yoy, KBVS: 0.13% mom or 4.92% yoy), from 5.47% yoy in Feb '23. Rising airfares (+0.17% yoy), house contracts (+0.13% yoy) and rising rice prices (+0.35% yoy) were the main drivers of inflation this month. Meanwhile, based on its components, the highest inflation came from administered price inflation, which reflected the increase in subsidised fuel since Sep '22 as well as the increase in cigarette excise tax per 1 Jan '23 (as per PMK No. 191 Year 2022). Meanwhile, the information, communication, and financial services group experienced deflation of 0.03% (mom) or deflation of 0.23% (yoy), which was mainly driven by deflation in the information and communication equipment sub-group of 1.23% (yoy). Wholesale price index (WPI) inflation fell 0.27% mom or at 5.44% yoy in Mar ’23 (Prev: 0.32% mom or 5.93% yoy). In line with CPI inflation, higher commodity prices of clove cigarettes with filter and rice, in addition to palm oil, ginger, garlic and non-subsidised petrol were the biggest drivers of price increases on a monthly basis. We view this as the impact of weather anomaly that occurred in late February to mid-March, in addition to the demand push at the end of month along with Ramadhan season. Meanwhile, the prices of diesel (-3.69% mom); cement (-0.46% mom); rebar (- 0.41% mom); and building foundation stone (-0.16% mom) highlighted the demand risk from construction and housing sector in early 2023. The manageable inflation in Mar '23 increased the real yield to 189.0bps (Prev: 141.0bps) and is expected to further attracts foreign capital appetite towards domestic financial market. In addition, with core inflation already at 2.94% yoy (Prev: 3.09% yoy), we expect that it will provide room for BI to maintain BI7DRRR at current level, henceforth opening the possibility of BI7DRRR cut by the end of 3Q23. With precaution, this condition can be supported by the stability of Rupiah, which we expect to ranged between IDR14,900 and IDR15,500 per USD during 2023. Going forward, we are of the view that this condition will push 2023 year-end headline inflation to be between 3.2% - 3.6% (yoy) and contribute to economic growth to be between 4.9% - 5.5% (yoy). However, we are hoping that the government could address: 1) the distribution and logistic risks towards Iedul Fitri amid the opening of domestic mobility; 2) risk of weather anomalies that will result in the volatility of horticultural commodity prices (volatile foods components) throughout the year and; 3) coordination among economic authorities both in maintaining the possibility of global geopolitical transmission as well as domestic political tension towards election in 2024. However, we expect above conditions to be supported by monthly trade surplus that will still occur around USD3.0 bn.

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