Indonesia inflation returns to central bank target range in May

INDONESIA’S annual inflation rate eased to 4 per cent in May, matching the upper end of the central bank’s target range earlier than expected, data from the statistics bureau showed on Monday (Jun 5).

Inflation in South-east Asia’s largest economy had been above Bank Indonesia’s (BI) 2 per cent to 4 per cent target range since June 2022 due to pressures from rising global food and energy prices.

Peaking near 6 per cent in September, inflation has since eased gradually after the central bank hiked interest rates by a total of 225 basis points.

A Reuters poll of analysts had expected May inflation at 4.22 per cent. In April, the rate was 4.33 per cent.

The core inflation rate, which strips out government-controlled and volatile food prices, eased to 2.66 per cent in May from 2.83 per cent a month before. The poll had expected 2.80 per cent.

At BI’s last policy meeting, it had expected headline inflation to ease to within its target in the third quarter, with core inflation seen staying within the same target band throughout the year.

Pudji Ismartini, deputy head of the statistics bureau, attributed slowing inflation to declining airfares after the Eid al-Fitr festivities.

“Indonesia’s inflation continues to surprise on the downside as seasonal festive effects fade and administrative measures help to calm food cost,” said DBS economist Radhika Rao.

Rao expected BI to maintain a neutral policy stance, but to pivot towards easing in the third quarter, citing the trajectory of inflation and BI’s “constructive view on the currency”.

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Even as inflation returned to target “much earlier than expected”, Bank Danamon economist Wisnu Wardana predicted BI would keep rates unchanged throughout the year, as downside risks from declining global food prices were balanced by rising oil prices due to production cuts by OPEC+.

Speaking separately at a parliamentary hearing, BI governor Perry Warjiyo said the bank’s interest rate policy would be guided by inflation developments.

He also reiterated that he believed the rupiah would strengthen further against the US dollar through to 2024 due to improving fundamentals.

BI will lower its inflation target next year to a 1.5 per cent to 3.5 per cent range. REUTERS