July trade and August inflation are the key data this week (Wednesday), followed by the monthly BI meeting scheduled on Friday. Merchandise exports are likely to slow to 29% YoY in July from 31% in the prior month (consensus: 28.2%), in tandem with the moderation in export numbers seen across the region. Trade surplus is expected to remain weak at less than USD 1bn for the second consecutive month (USD 0.6bn in June). Despite the weakening in merchandise trade balance, Indonesia ’s overall balance of payments has continued to strengthen thus far supported by portfolio capital inflows. Foreign reserves increased a solid USD 2.5bn in July and surpassed the peak level of USD 78.6bn recorded in April prior to the European debt crisis. Foreign reserves have risen further in August to more than USD 80bn according to official information.
More attentions will be given to inflation data. Headline CPI inflation is likely to rise further to 6.5% YoY in August after breaching the 6% mark in July (consensus: 6.7%). In MoM (sa) terms, the increase in consumer prices should also stay high at 1% for the second consecutive month, well above the long-run average of 0.5%. Food prices are likely to account for the majority of the CPI rises, partly due to the early arrival of the Ramadan fasting month, partly due to bad weather and harvest failures. Core inflation thus far remains benign at the 4% level (though we think there will be upside risks). The central bank would wait for a while to judge whether inflationary pressures are solely due to seasonal and weather factors, or the demand-side dynamics will also develop. In terms of the possible policy reactions at this juncture, Bank Indonesia will likely opt to tighten liquidity quantity (via the reserve requirement ratio) to anchor inflation expectations, rather than directly boosting interest rates. We expect BI to leave the overnight reference rate unchanged at 6.5% at Friday’s MPC meeting, before hiking rate in 4Q (October/November).
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