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CPI & SBI Outlook
Inflation Outlook March 2015
March 27, 2015 09:26

Inline with our earlier projection, the headline inflation rate fell further in February 2015. On a MoM comparison, the CPI showed higher deflation of 0.36 percent MoM, or translating into YoY inflation of 6.29 percent. By component, the food and non-food components declined by 0.61 percent and 0.22 percent, respectively.

Prices rose in all CPI components except the foodstuffs and transportation component. In the foodstuffs component, prices fell 1.47 percent due to the start of the harvesting season while in the transportation component prices fell 1.53 percent MoM, largely driven by the impact of the government’s move to cut retail prices of fuel in January. By contrast, prices in the clothing component rose the most (up 0.52 percent), followed by the prepared foods component (+0.45 percent MoM), the housing component (+0.41 percent MoM), the medical care component (+0.39 percent MoM), and the education component (+0.14 percent MoM).

In March, seasonality from the harvesting season will result in downward pressures on prices in the foodstuffs component. The harvesting of crops (especially those grown in paddy fields) will drive rice prices down. March average rice prices remain above the February average level, but shows a declining trend. From the production side, the government targets 73.4 million tons of milled dry grain rice production in 2015, or 3.7 percent higher than last year’s production.

The price of several commodities tend to increase such as red onions, cooking oil, and flour. At the same time, the collapse in global oil prices will help to keep domestic fuel prices stable. Hence, we predict March inflation of 0.16 percent MoM, translating into YoY inflation of 6.38 percent.

In the latest development, Bank Indonesia maintained its benchmark BI rate at 7.50 percent, with the Deposit Facility rate and the Lending Facility rate unchanged at 5.50 percent and 8.00 percent, respectively. The BI’s goal of achieving a healthier current account (2.5-3.0 percent of GDP) was one of the main factors behind BI’s move to keep the BI rate at its current level. However, we continue to believe that there is still scope for further cuts in the benchmark rate given the benign outlook for inflation over the near- term