Consumer price inflation slowed to 0.44% mom or 5.80% yoy in Sep10 from 0.76% mom or 6.44% yoy in Aug10. The figure is below our and consensus estimate of 0.56% mom. Year-to-date inflation has been 5.28%.
Higher prices of clothing (0.07ppt), processed food (0.10ppt), and transportation (0.09ppt) during the festive season were the main drivers of the Sep10 inflation. Raw food inflation softened as the prices of several commodities, such as chili and other spices dropped faster after the fasting month ended.
Although inflation eased in Sep10, we think the bigger trend remains on the upside. Increasing government’s spending later this year and Christmas and year-end celebration will likely stoke inflation again. At this juncture, we maintain our inflation forecast at 6.3% yoy for 2010 and 6.6% for 2011.
We believe tame inflation number in Sep10, particularly was reflected in the stable core inflation that has been steadily hovering around 4.0% yoy since the beginning of the year, would provide credible justification for the central bank to keep the interest rates flat longer. We currently expect the BI rate to start to increase in 2Q11 by 50 bps to 7% by YE11 on stronger growth momentum.
Trade balance was back in the black in Aug10 with US$1.5bn of surplus as imports declined to US$12.2bn from US$12.6bn in Jul10 (but up 25.9% yoy), while exports improved to a new record high of US$13.7bn from $12.5bn (+30% yoy) For comparison, imports was 45.3% on year in Jul10, and exports rose 29.0%. We expect trade surplus will likely remain suppressed, but we don’t expect to see sharp deterioration in the current account balance. Gradual improvement in external demand, led by the Asia region, and pickup in commodity prices likely w! ill balan ce rising demand for imported goods.
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