BI is expected to extend its pause on rates today, in line with its focus on maintaining stability in the FX markets. Headline inflation ticked up to 2.8% yoy in Feb from 2.6% month before, driven by a sharp 8.5% increase in the volatile gauge (supply-driven). Sequential pressures have risen on higher rice prices, risks to domestic production from El Nino and stronger demand in midst of religious festivities. Mar-Apr readings are also expected to be firm, albeit fall within the 1.5-3.5% BI target. Additionally, there is considerable uncertainty in the pipeline with regards to the direction of global interest rates, particularly for the US Fed as markets continue to delay expectations of a start to the rate easing cycle. All eyes are trained on the FOMC meeting later tonight and the accompanying dot-plot. The resultant volatility in the US dollar and rates is likely to swing the Indonesian markets, necessitating the central bank to maintain a favourable ID-US differential for the time being.
The BI is likely to be focused on FX stability in the face of a narrowing trade surplus and wider current account deficit in 2024. Jan-Feb24 trade surplus declined by nearly 70% yoy to $2.9bn vs $9.2bn in the comparable period year ago. This is backed by ~9% drop in exports whilst imports were up 7.5% in the same period. Frontloading in investments ahead of the political transition, pre festive demand (consumption goods and oil) and higher food (rice) purchases lifted total imports. Exports on the other hand continues to be bogged down by negative price effects, led by lower coal, palm oil and iron ore shipments, besides few distortions amongst trading partners during the Lunar New Year closures. This is likely to see the current account swing from a modest -0.1% of GDP in 2023 to above -1% in 2024. While our end-year forecast for the BI rate remains at 5.75% (from 6% currently), the start of the easing cycle is likely to lean towards late 3Q24 rather than mid-year.
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