January deflation came in at 0.07% mom, in line with market consensus but higher than our prediction of -0.23% mom, as we expect greater impact on transportation tariff reduction following fuel price cut in the middle of Jan09. Thus, we expect to see further second round impact of fuel cut in the following months.
Besides a deflation on transportation component, such as fuel (-0.4ppt)and transportation tariff (-0.1ppt), housing sector also posted a price decline helped by lower household fuel (-0.1ppt). But, surprisingly, food sector experienced an inflation led by relatively high rice price (0.1ppt).
Weaken domestic demand has been reflected in a sharp drop in core inflation to 7.39% yoy from 8.29% yoy in Dec08, indicated slowing economic activity as global economic slowdown take into affect on domestic economy.
Trade balance slightly decline to US$2.4bn in Dec08 from US$2.5bn, as total export and import outside FTZ dropped by 20% yoy (US$8.7bn)and 8% yoy (US$6.3bn) respectively in Dec08. A whole year trade balance reached US$32.1bn or declined by 19% yoy in 2008.
Taking this together we think BI is going to continue to take its aggressive easing stance by cutting the rate by 50bps to 8.25% in order to support the economy. Currently we maintain our inflation forecast at 6.8% yoy and BI rate at 8% by the end of 2009.
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