Inflation Benign for Rest of Year, Expect Further 50bps Benchmark Rate Cut: Danamon
Jakarta. Inflation looks tame for the rest of the year after all the demand during shopping frenzy in Islamic holy month of Ramadan and Idul Fitri celebration only managed to bump up prices slightly, presenting a case for the central bank to cut its interest rate further, economists from Bank Danamon Indonesia said.
The annual inflation rate in June accelerated slightly to 3.45 percent, compared to 3.33 percent in May, as prices of foods, gold jewelry and transport tariffs rose ahead of the festivities, the Central Statistics Agency (BPS) announced last week.
The core inflation rate — which has taken out volatile food and administered prices — stood at 3.49 percent, compared to 3.41 percent a month earlier.
Bank Danamon's chief economist Anton Hendranata and economist Wisnu Wardana wrote in a note that due to the government's decision to keep the price of subsidized electricity unchanged, pressure for rising inflation in the next six months would only come from a higher diesel fuel price.
But the fuel price only accounts for 0.2 percent of the total price basket used to calculate the rate of inflation, making its impact on headline inflation minimal.
"Inflationary risks until the end of the year continue to be quite benign," the economists said. They forecasted full-year inflation of 3.94 percent.
The government has set a target of 4 percent inflation this year. Bank Indonesia, the country's central bank, expects inflation to be between 3 percent and 5 percent. It has therefore been cutting its benchmark interest rate by 125 basis points since the beginning of this year to sit at 6.5 percent currently.
The central bank will start to use a seven-day reverse repo rate on Aug. 19 in place of the current benchmark in order to have more influence on market rates.
"We foresee that further monetary easing is on the table with two 25 bps cuts in the seven-day reverse repo rate by July and August," Anton and Wisnu wrote.
The economists said they also believe the central bank needs to focus on reducing money-market interest rates for periods of more than three months in order to encourage banks to lend more.
"By flattening the belly and end-of-term structure, banks will be encouraged to supply credit during a low-interest rate environment," they wrote.
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