3 July 2018
Indonesia: June inflation slows to 15-month low

June inflation of 3.12% was the slowest since March 2017. As a result, we've now cut our inflation forecast for this year

Inflation slowdown partly due to base effects

June inflation slowed to 3.12% from May’s 3.23% and June 2017’s 4.37%. The slower June inflation is partly due to base effects and slower inflation for most major commodity groups of the consumer price index except for food and transport rates. Food inflation accelerated in June to 4.7% from May’s 4.5% and 2.4% in June 2017. Transport inflation also accelerated to 1.9% in June from May’s 1.7%.

Inflation forecast cut

We expect the positive base effects in the coming months to recede and bring about a reversal of the recent downtrend of inflation. The upward path of inflation in the second half would also be gradual and could likely be a mirror image of the inflation path in the first half. Tighter monetary policy in the past two months which saw policy rates rise by 100 basis points would moderate demand pull inflation and assist in moderating the price impact of a weak Indonesian rupiah (IDR). Monetary policy will continue to pursue a stabilisation of the IDR, not only to help protect the financial system but also to keep inflation within target rate. We expect full-year 2018 inflation to average at 3.3%, slower than our previous 3.5% inflation forecast and close to the central bank's point inflation target of 3.5%. 

Thailand: A downside inflation miss

With the lingering global trade risk and persistently low inflation, we don’t think the BoT will be in a position to unwind its policy accommodation anytime soon

Below-consensus June inflation

Thailand’s consumer price inflation surprisingly slowed to 1.4% year-on-year in June from 1.5% in May. The consensus expectation was for inflation to remain unchanged at 1.5%. The Bloomberg headlines point to energy prices as a source of inflation – a result of rising global oil prices. But lower food-price inflation more than offset the energy increase to push the headline rate lower. Core inflation, which strips out food and energy prices, was steady at 0.8%.  

Steady, low inflation ahead

We believe inflation is close to its peak in the current cycle. Absent significant supply shocks from food or oil prices, we expect inflation to remain close to the low end of the central bank’s (BoT) medium-term policy target of 1-4%. The commerce ministry has just announced a mild adjustment to its full-year 2018 average inflation forecast to 0.8-1.6% from 0.7-1.7%. The BoT’s forecast is 1.1%. We forecast 0.9%. 

Stable central bank policy

The BoT easing cycle started in early 2012 is finally beginning to see some light at the end of the growth tunnel, though this hasn’t lifted inflation. With the lingering global trade risk to growth and persistently low inflation, we don’t think the BoT will be in a position to unwind policy accommodation anytime soon. Nor do BoT policy-makers appear in any rush to do so, given their recent dovish rhetoric.

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Good MornING Asia - 3 July 2018

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