The higher interest rate is not only meant to combat inflation but also to guard Indonesia from the adverse impact on capital outflows due to other countries’ monetary tightening policy.
Increased demand for energy products from other countries also helped exports to rise. However, we expect the strong export rally will likely to be softer as the commodity prices are normalizing.
The prices of non-subsidized fuels have been cut instead as mentioned below. The fuel price hike is the government’s last option to reduce the ballooning energy subsidies due to the higher global oil price.
The core inflation has already achieved 3.04% YoY or slightly surpassed the favorable level at 3% YoY. This may be a hint for Bank Indonesia (BI) to raise the interest rate again by 25 bps this month.
Statistics Indonesia (BPS) recorded 0.64% MoM (4.94% YoY) of inflation in Jul-22 or the highest since Oct-15 where it was at 6.25% YoY. The rate was higher than our estimate and consensus at 4.72% and 4.82% YoY.
Household still played the most important role as it contributed 51.5% to GDP. It grew at 2.42% QoQ (5.51% YoY) in 2Q22. The growth was on the back of Ramadan momentum and the ease of Covid-19 cases back then.
Indonesia briskly rebounded as the economic growth jumped from -0.74% YoY in 1Q21 to 5.01% YoY in 1Q22. For 1H22, we predict it will grow at 4.7% YoY emphasizing the consistent economic recovery amid the pandemic.
The export plummeted due to the palm oil export ban to curb the rising domestic inflation from cooking oil prices hike in May-22. Besides, the slower import was still associated with China’s feeble economy as the China government still imposes several lockdowns there.
The inflation will go up with decent pace in 2H22 as the price normalization goes on especially on food and transportation prices after Ramadan month and the fuel price hike lately. Besides, the core inflation showed a slight deceleration compared to the previous month.