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ECONOMIC UPDATE - Inflation remains within the BI's target range, rising 2.56% YoY



Monthly inflation rate slightly decelerate

According to Statistics Indonesia (BPS), the monthly inflation rate in October slowed to 0.17% MoM, lower than the previous month's 0.19% MoM. This came in below both our projection of 0.18% MoM and the consensus estimate of 0.20% MoM. The primary driver behind this inflation was the transportation group, which contributed 0.07% MoM to the overall inflation rate. This basket experienced an inflation rate of 0.55% MoM, primarily due to the increase in non-subsidized fuels prices such as Pertamax, Pertamax Turbo, Dexlite, and Pertamina Dex. Additionally, the food, beverage, and tobacco basket exhibited the second highest growth, with a 0.20% MoM increase, contributing 0.05% MoM to the inflation rate. This trend is consistent with the El-Nino season, which raised food prices. Furthermore, the core inflation rate for October was reported at 0.08% MoM, slightly below the previous month's figure of 0.12% MoM. Moreover, volatile food inflation decelerated by 0.21% MoM compared to the previous month's 0.23% MoM. Meanwhile, administered prices experienced an inflation rate of 0.46% MoM, indicating an acceleration compared to the inflation rate of 0.23% MoM in the previous month.


The yearly inflation rate inches up on food prices

On a yearly basis, the inflation rate for October reached 2.56% YoY, showing an acceleration compared to the previous month's rate of 2.28% YoY. However, this rate remains within the central bank's target inflation range of 2%–4%, marking the sixth consecutive month within this target range. In addition, the inflation rate came in below both our projected estimate of 2.58% YoY and the consensus estimate of 2.60% YoY. Notably, the food, beverage, and tobacco basket exhibited the highest growth and was the biggest contributor to the inflation rate, rising by 5.41% YoY and contributing 1.39% YoY to the inflation rate. Meanwhile, the personal care and other services group, as the second highest group experienced inflation, recording a rate of 3.67% YoY and contributing 0.23% YoY to the inflation rate. Furthermore, core inflation reported a value of 1.91% YoY, falling below both our estimated value of 1.95% YoY and the consensus estimate of 1.98% YoY. Looking ahead, we anticipate the inflation rate to reach 3.2% YoY by the end of 2023, driven by consistent monetary policy and collaborative efforts between central and regional governments in controlling food prices. However, we remain cautious about potential inflationary pressures arising from factors such as El Niño, rising oil prices, and a weakening Rupiah. According to the Meteorology, Climatology, and Geophysics Agency (BMKG), El Niño is expected to continue until February 2024, potentially leading to higher food prices. Besides, the escalating tension between Hamas and Israel is a concerning issue, not only for the immediate region but also due to its potential implications, including the impact on global oil prices. Meanwhile, global financial uncertainty, combined with expectations of the Federal Reserve (the Fed) maintaining a "higher for longer" interest rate stance, has resulted in capital outflows, which may weaken the Rupiah and increase imported inflation.


Inflation rate by expenditure groups

On a yearly basis, all of the expenditure groups rose in October, namely: food, beverages, and tobacco group of 5.41% ; clothing and footwear group of 0.85% ; housing, water, electricity, and household fuel group of 1.16% ; furnishings, household equipment, and routine household maintenance group of 1.89% ; health group of 2.04% ; transportation group of 1.20% ; recreation, sport, and culture group of 1.50% ; education group of 1.99% ; food and beverage serving services/restaurant group of 2.21% ; personal care and other services group of 3.67%; and the information, communication, and financial services group reported a deflation of 0.11%.


BI’s strategy to stabilize rupiah amid global uncertainty

Bank Indonesia (BI) raised its benchmark interest rate (BI 7DRRR) by 25 bps to 6.00% in October, marking the end of a nine-month rate pause. This rate hike, which exceeded both our expectations and the consensus, brought the benchmark to its highest level since June 2019. Alongside this move, deposit and lending facility rates also increased to 5.0% and 6.5%, respectively. The primary aim of this rate adjustment is to reinforce the Rupiah exchange rate stabilization policy, responding to the growing global uncertainty. It serves as a proactive and forward-looking measure to mitigate the impact of this uncertainty on imported inflation and to ensure that inflation remains within the target range of 3.0%±1% for 2023 and 2.5%±1% for 2024. Furthermore, BI intends to continue stabilizing the Rupiah exchange rate through various interventions in the foreign exchange market, including spot transactions, Domestic Non-Deliverable Forward (DNDF) operations, and purchases of Government Securities (SBN) in the secondary market. In addition, BI will continue to issue Sekuritas Rupiah Bank Indonesia (SRBI) to attract foreign investors, with SRBI having shown promise in absorbing liquidity. Notably, new monetary instruments, Sekuritas Valuta Asing Bank Indonesia (SVBI) and Sukuk Valuta Asing Bank Indonesia (SUVBI) will be introduced to deepen the money market and support portfolio inflows. These foreign currency securities will have short-term tenors and become effective on November 21, 2023. We anticipate that BI will maintain the interest rate at 6.00% until the end of the year, with a potential reduction to 5.00% next year in response to the easing of global uncertainty. Meanwhile, the upcoming FOMC Meeting in November 2023 remains a key event to monitor, with market consensus broadly expecting the Fed Fund Rate (FFR) to be unchanged, but hinting at a possible rate hike at the end of the year.