Economists stick to forecasts despite Indonesia inflation surprising on downside

THOUGH Indonesia's inflation figures for April surprised on the downside for the third straight month, economists are maintaining their expectations for it to pick up in the coming months.

Indonesia's headline inflation was 1.42 per cent year on year in April, up modestly from 1.37 per cent in March and below the consensus forecast of about 1.5 per cent, with rising food prices offset by a continued decline in energy prices.

Core inflation, which excludes volatile food prices and government-controlled prices, stayed at its record low of 1.2 per cent.

Citi economist Helmi Arman noted that widely-expected low base effects from last year's lockdown have been modest, due in part to a shortening of the upcoming holiday period and restrictions on intercity travel.

Citi is not changing its forecast range of 1.7 to 2.5 per cent for full-year headline inflation, though it does "acknowledge a growing possibility" of it remaining below 2 per cent.

"We would also not be surprised if policymakers at Bank Indonesia begin to tone down their inflation projection," he added, noting that this stood at around 2.8 per cent, according to a meeting in early April.

April's inflation fell short of Citi's forecast due to lower than expected inflation in food prices, which "could be a sign of grassroots purchasing power staying relatively weak", and a lack of increase in transportation tariffs, which is likely due to travel restrictions ahead of the mid-May festive season, he said.

Noting the modest rise in food, beverage and tobacco price of 2.3 per cent, compared to 2.2 per cent in March, Maybank Kim Eng analysts Lee Ju Ye and Chua Hak Bin said that the impact of the Ramadan season "seems to be mild at this stage".

"We expect inflation to pick up in the coming months, partly due to low base effects and as domestic demand recovers," they added, maintaining their full-year inflation forecast at 2.4 per cent.

Though declining inflation forecasts imply a rise in the expected real interest rate, Citi maintains its call that policy rates have bottomed and does not expect rate cuts to be put back on the table, barring a "significant downside surprise to GDP growth" or a "material improvement in the outlook for capital inflows".

The release of first quarter GDP and employment data on May 5 is therefore worth watching, Mr Helmi added - the latter "for more colour on the state of grassroots purchasing power".

The Maybank economists similarly expect the central bank to keep the policy rate unchanged at the current historical low of 3.5 per cent.