Inflation rate eased to 0.19% mom in Oct09 and 2.57% yoy, undershooting our and consensus expectation of 0.35% mom and 0.44% mom respectively. Lower raw food inflation and deflation in transportation tariffs drove inflation lower than we anticipated.
Although Oct09 inflation was lower than our expectation, we don’t think that it would significantly affect our full-year forecast. We are still comfortable with our inflation forecast of around 4% yoy in 2009 and likely increase to 6.3% in 2010 on the back of improvement in domestic demand, higher commodity prices, and possible increase in administered prices.
Accordingly, we still expect Bank Indonesia to maintain its policy rate flat at 6.5% for the rest of the year. We think at the current rate the monetary policy remains accommodative to economic growth, while helping anchor inflation expectation next year. We think BI would start to increase the rate in Jun 2010 by 25bps each month to 7.25% by YE10.
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