Headline July CPI inflation rose to 6.2% against expectations of 5.8% (and that consensus was biased upwards by government guidance). Detail of the CPI less worrying than the headline: food prices accounted for much of the surprise, with core inflation still low for Indonesia at 4.2% (consensus 4.1%, previous 4.0%).
We have long been of the view that Indonesia would see accelerating inflation this year, in response to loose credit conditions. We continue to expect inflation to normalize towards an average of 7% in 2011and for the BI to begin to raise policy rates in 2010. The consensus had been moving towards the initial policy rate increases occurring in 2011. While more hawkish comments may be forthcoming in Wednesday's monetary policy decision statement, we would not expect the BI to raise rates at this juncture - given that the central bank can still point to low core inflation and potentially temporary food price increases.
However, consumer confidence data released overnight suggests that inflation expectations are moving higher amongst households (please refer to Chart of the Day below).
Indonesia’s export growth undershot at 31.7% YoY in June (consensus 34.9%) while import growth overshot at 47.3% YoY in June (consensus 33%). Trade balance stood at US$0.6 bn in June against consensus US$1.8 bn.
The ongoing strength of import relative to export growth is a further indicator of strong domestic relative to external demand. The weaker than expected trade balance, higher than expected inflation and a likely tepid BI response (facilitating lower real interest rates) all point to a softer IDR. Our year end currency forecast remains USDIDR 9400.
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