Bank Indonesia stays on hold; we see inflation risks
- Bank Indonesia maintained its policy hold while trimming growth forecasts
- The central bank maintained its sanguine view on inflation, but we see upside risks
- High commodity prices are a mixed bag
- Implications for forecasts: We revise up the 2022 inflation forecast
- Implications for markets: Trade outperformance is positive for the currency
Bank Indonesia on pause
A cut in the global growth projection to 3.5% (vs 3.8-4.2% at the March review) was accompanied by a marginal reduction in Indonesia’s growth forecast to 4.5-5.3% vs 4.7-5.5% previously. Our forecast stands at 4.8% yoy. The central bank opted to be cautious on the trade outlook, saying that export volumes were at risk down the line due to the Russia-Ukraine conflict, suggesting that the central bank is opting to be stay cautious on the trade/growth outlook.
The urgency for imminent action is low as inflationary risks are contained, in the central bank’s view. Additionally, hawks are also restrained by a positive real rate buffer and relative rupiah outperformance vs regionals, providing the BI with adequate headroom to extend its accommodative bias in the near-term. The real rates cushion has nonetheless narrowed vs last year (see chart).
- The 1% increase in the value-added tax that kicked in from April, is estimated to add 0.5% to annual inflation
- Removal of caps for cooking oil price
- High-octane Pertamax variant price hike by a third to IDR12500/bl (a sixth of fuel demand)
- Fuel variant Pertadex has been raised by 23% by Mar22 vs late 2021. Concurrently, LPG prices (12kg) has been raised by 15% during the period, whilst price controls see other LPG variants held unchanged.
- There is a chance of a hike in the price of the highly subsidised Pertalite (RON 90), gasoline and diesel fuel in the coming weeks, possibly after the Lebaran period. Indonesia crude price is up 55% by Mar22 vs late 2021. The state budget oil assumption is at $63pb vs the Indonesian crude price at $113pb in Mar22. We will watch for adjustments, as the commonly used variants make up four-fifth of total fuel consumption. Besides partial adjustment in fuel prices, the medium-term initiative to gradually phase out low grade fuels for high grade and cleaner fuels is also likely to be pursued.
- Pass-through of hikes by companies/ producers after Ramadan
- Global food price indices have also risen sharply, including cooking oil and wheat (Indonesia sources a fifth of its supply from Ukraine) is likely to raise import costs at the margin and reflect in downstream food industries like cereal/bread, grain-based food products, besides soyabean, cooking oil, fertilizer prices.
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