[JAKARTA] Indonesia’s Consumer Price Index (CPI) fell to 2.84 per cent in May annually, driven by declining food and energy prices, according to data from Indonesia’s Statistics Bureau released on Monday (June 3).
This figure is lower than April’s 3 per cent and below the 2.94 per cent forecasted by analysts polled by Reuters.
On a monthly basis, headline inflation decreased to 0.03 per cent from 0.25 per cent.
May’s inflation rate in the country remains within the central bank’s target range of 1.5 to 3.5 per cent for the year.
Core inflation, which excludes volatile items such as fuel, rose to 1.93 per cent, up from 1.82 per cent in April.
Amalia Adininggar, acting head of Indonesia’s Bureau of Statistics, noted that Indonesia experienced a drop in food such as meat, chicken and eggs coinciding with the conclusion of the Eid al-Fitr holiday.
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As the influence of Eid al-Fitr gradually diminishes, economists foresee Indonesia’s inflationary pressures continuing their downward trajectory in the months ahead.
Despite remaining within the central bank’s target range, challenges loom for Bank Indonesia (BI) in lowering its benchmark interest rate. This is largely due to uncertainties surrounding the US Federal Reserve’s stance on interest rate cuts, prompting heightened net sell-offs from emerging markets, including Indonesia.
David Sumual, senior economist at Bank Central Asia, said BI will prioritize exchange rate stability and ensuring sufficient foreign capital inflows, which requires closely tracking and reacting to Fed policy given the US dollar’s global dominance.
“It is likely that the BI rate will continue to be held until the end of the year,” Sumual told The Business Times.
BI raised its benchmark interest rate to 6.25 per cent in an unexpected meeting last April, aiming to prevent a plunge in the rupiah, which had weakened by around 3.74 per cent since the end of last year.
Fithra Faisal, a senior economist at Samuel Sekuritas, has indicated the possibility of another rate hike in June or July.
He points to the narrow difference between the BI rate and the Fed’s fund rate, along with the depletion of FX reserves resulting from rupiah defense measures, as key factors influencing this projection.
“BI’s potential move to raise rates in June or July may be justified by Indonesia’s widening current account deficit, per our projection to reach 0.7 percent,” Faisal said.
Indonesia’s foreign exchange reserves decreased to US$144.04 billion in February, down from US$145.05 billion in January 2024, suggesting that the central bank has tapped into its forex reserves to stabilise the rupiah.
