Indonesia Macro Update - INF 02 Aug 2024
KBVS MACRO UPDATE
Friday, 2 August 2024
Three Consecutive Months of Deflation, but BI Rate Reduction Still Awaits Rupiah Stability
As anticipated, deflation occurred again for the third consecutive month, with Jul '24 at -0.18% MoM or 2.13% YoY. However, we are concerned that three consecutive months of deflation could also signal of: a) a wait-and-see attitude, and/or b) a decline in consumer purchasing power, and/or c) a shift in consumption patterns, particularly evident in the middle class in Indonesia.
On the other hand, the decline in inflation naturally pushed the real yield of the 10Y SUN to 479.0 bps in Jul '24 (Prev: 454.0 bps), the highest level since Jul '21. At the same time, within the Inflation Targeting Framework, the decline in inflation should serve as a basis for lowering the BI Rate soon. However, considering BI's intermediate target of the Rupiah exchange rate and the transmission mechanism of the Rupiah to monetary policy, with the Rupiah's volatility as reflected by the standard deviation still at 0.7% in Jul '24 (Prev: 0.8%), we see the potential for a BI Rate cut becoming viable when the DXY is at a lower level, which we expect will be triggered by a 25 bps Fed Rate cut at the upcoming FOMC meeting in 18 Sep '24.
Regards,
Fikri C Permana - KBVS Research Team