Macro Economic

Indonesia Macro Update - INF 03 Oct 2023

Fikri C. Permana 03 October 2023

Tuesday, 3 October 2023

Softer Headline Inflation Provides Room For BI7DRR Cut

The cessation of the annual inflation high-base effect since Sep '22 amid the subsidized fuel price increase, has propelled a significant decline in Sep ‘23 headline inflation to 2.28% YoY (Cons: 2.20% YoY; KBVS: 2.13% YoY; Prev: 3.27% YoY). Furthermore, this has also led to a more favorable Received Price Index by Farmers (it) for the Rice Crops group in the same month, with a notable improvement at 5.31% MoM (Prev: 2.13% MoM). The rice prices hike is also followed by increases in the prices of beef, mobile phone tariffs, tuition fees, non-subsidized fuel, and filtered clove cigarettes.

In Oct '23, with the global oil price trend still at elevated levels, coupled with the non-subsidized fuel price increase on 1 Oct ‘23, and the risk of declining food supply due to the ongoing El Nino effect until Nov '23, we are concerned that it may continue to drive an increase in year-end inflation close to 2.83% YoY. Nevertheless, despite the possibility of a Fed Rate hike, this headline inflation level still provides room for a reduction in the BI7DRR by year-end, contingent upon a stable Rupiah, as well as consistent capital inflows and yields on SUN during the same period.

Fikri C Permana - KBVS Research Team