Consumer Price Index rose by 0.76% mom or increased 6.44% yoy in Aug10 lower than our and consensus estimates. Year-to-date, the CPI has increased 4.82%. Aug10 inflation was mainly driven by electricity tariff hike (0.35ppt) and processed food (0.11ppt). Meanwhile, raw food prices only increased slightly (0.09ppt), as some of the prices have started to decline from their peaks in Jul10 inflation.
Given the current inflation rate, we still believe this year inflation figure likely will exceed the central bank target of 4%-6% in 2010. Besides rising demand, unfavorable climate that may trigger a spike in food prices, and increase in administered prices would drive the inflation higher. Thus, we revised our inflation forecast to 6.3% yoy in 2010 from previously 5.9% yoy and maintain 6.6% yoy inflation next year.
We expect to see a more hawkish stance in BI policy statement, as there some indication that demand started to stoke inflation and inflation expectation is building up, indicating by a steady increase in core inflation However, we believe, the central bank may refrain from raising the rate at the next board meeting on Friday (3/9) and opt to increase reserve requirement instead. We maintain our first rate hike on Nov10 by a total 50 bps this year and another 50 bps next year that will bring BI rate to 7.5% by YE11.
Trade balance turned deficit in Jul10 of US$0.13bn, as export stabilized (29.0% yoy) and imports surged (45.3% yoy). Despite the persistent trend, the deterioration in trade balance may not have directly put pressure on the currency as we believe it will be compensated by capital inflows.
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