Inflation to Rebound From 2016’s Seven Years Low
In line outcome. Dec16 CPI increase of 0.42% MoM translates into decelerated inflation rate of 3.02% YoY (Nov16: 3.58% YoY), in line with our and consensus estimates. Holiday season sent up transportation costs to contribute the most to the monthly inflation (+0.15ppt). Again, we have yet to see turnaround in demand pressure provided that core inflation was flat at record low 3.07% YoY as opposed to expectations of a rise. It has been easing throughout 2016 from 3.95% YoY in YE15.
Expect rebound from 2016’s low note. YE16 inflation realization indeed undershoots our expectation of 3.3%. Being the least since 2009, benign inflation is supported by stable subsidized fuels prices amid globally low cost of oil, foodstuff import policy, and moderating domestic demand. We expect inflation rate to rise to 4.2% in YE17 on the back of administered price adjustment. Electricity tariff increase that has already started will be the main driver, contributing inflation by 0.8-1.0ppt by end-Jun17. On the other hand, demand pull inflation, measured by the core inflation, is expected to remain subdued at below 4% in 2017 because of flattish private consumption.
No room for easier monetary policy rate. We think that Bank Indonesia will have no room to cut its policy rate along 2017. Rising inflationary pressure would be exacerbated by gradually picking up expectation if international oil prices continue to creep up and resulted in higher domestic fuel prices. The prospect for a more aggressive federal funds rate hike also pose risk to the rupiah due to financial sector volatility. We maintain our flat 7-day reverse repo rate forecast at 4.75% in 2017.