Indonesia keeps dovish tone on steady core CPI

Bloomberg

Indonesia’s central bank continued to build the case to keep its policy rate unchanged for longer, as it sees subsiding
food costs and slower global monetary tightening.
“Bank Indonesia will continue to normalise monetary policy, but there is no need to quickly raise interest rates like other countries,” Governor Perry Warjiyo said in a briefing.
Core inflation is “still low,” while food prices should ease in coming months, Warjiyo said. The Fed is seen to take a less aggressive stance in September with a 50-basis point rate hike amid growing fears over a US recession, he added.
The governor’s comments could set the stage for yet another hold this month, solidifying Indonesia’s position as one of the world’s last interest-rate holdouts. Policy makers have prioritized aiding the recovery of Southeast Asia’s largest economy, which Warjiyo said likely grew 5.05% last quarter.
Consumer prices jumped 4.94% in July, the most in nearly seven years, the national statistics agency said on Monday. It beat median forecast of 4.82% in a Bloomberg survey of analysts, and marked second straight month that it’s breached Bank Indonesia’s 2%-4% target.
However core inflation — the metric watched by the central bank in deciding on its interest-rate policy — crept up to 2.86% in July, still in the lower half of the monetary authority’s target range.
That could suggest that Bank Indonesia will likely be comfortable holding the policy rate this month, said economists Brian Tan and Shreya Sodhani at Barclays Bank. They expect a 25-basis points rate hike in September, followed by another two in the last quarter.
PT Bank Danamon Indonesia maintains its view that the policy rate will be raised this quarter as core inflation has continued to pick up since October and is testing the 3% threshold, said economist Wisnu Wardana.
Still, “if monetary policymakers hold up to their judgment on core inflation, there’s a good chance that BI’s key benchmark rate will remain unchanged this month.”
“The latest inflation results helped to keep monetary conditions accommodative. Current conditions imply that BI has scope to normalise monetary policy in the coming months without sacrificing too much economic growth,” said Jeff Ng, senior currency analyst at MUFG Bank who also predicts BI will begin raising borrowing costs next month.
Indonesia’s inflation in July was still mainly driven by the price of food items like red chili, cooking oil and shallots amid unusual weather like heavier rainfall and supply chain bottlenecks. Volatile food inflation accelerated further to 11.47% in July, an eight-year peak, according to data compiled by Bloomberg.