Indonesia Feb Inflation Cools Faster than Expected, More Rate Cuts Seen


MARCH 02, 2015

JakartaIndonesia's annual inflation eased more than expected in February due to lower oil prices, adding to views the central bank will roll out more interest rate cuts to prop up growth.

While oil prices have cooled inflation, the country's earnings have been hit be falling oil and commodities prices at a time when economic activity is slowing.

Annual inflation in February eased more than expected to 6.29 percent, from 6.96 percent in January. A Reuters poll had expected inflation to slow to 6.70 percent.

The consumer price index (CPI), on a monthly basis, fell for the second month at a rate of 0.36 percent.

Core inflation, which excludes administered prices and volatile food prices, slowed slightly to 4.96 percent in February from 4.99 percent the month before.

"Inflation is usually low in March and April, we could even be seeing monthly deflation in those months, or at least slow inflation," David Sumual, chief economist at Bank Central Asia in Jakarta said.

Inflation in Southeast Asia's largest economy has decelerated from its peak of 8.36 percent at the end of 2014.

Economists see falling inflation raising the chances of another rate cut.

"Bank Indonesia has said that they will be data dependent on policy making, so there's a big chance of another rate cut by 25 basis points even though the Fed said there was no change in its monetary policy direction and its rate can be raised as early as June," Sumual added.

ING Asia economist Tim Condon said in research note more cuts from Bank Indonesia could be expected this year. He forecast a cumulative 75-basis-point cut in Bank Indonesia's policy interest rate corridor by year-end, taking the main rate to 6.75 percent and the rate on its deposit facility to 4.75 percent.

In a surprise move, Bank Indonesia cut its benchmark interest rate by 25 bps to 7.50 percent last month saying inflation at the end of the year will fall below 4 percent. The central bank next meets on March 17.

President Joko Widodo said last week Bank Indonesia has scope to cut its policy rate again this year if inflation falls below 5 percent. Gasoline subsidies were removed in January, but prices have fallen since then due to a drop in global oil prices.

The fixed income markets in Indonesia have already signalled there will be further cuts this year in policy rates with yields of long term government bonds trading below the main central bank's rate since the beginning of the year, even when economists remain divided over the prospect.

The rupiah barely moved after the inflation data, but it touched a fresh 17-year low of 12,995 per dollar earlier in the day. On Friday, it depreciated after Bank Indonesia said inflation was expected below 6.50 percent in February.