October 3, 2024
JAKARTA – Consumer prices in Indonesia fell for the fifth month in a row, growing at the slowest annual pace in years, official data show on Tuesday, which analysts believe will give more room for Bank Indonesia (BI) to cut its benchmark rate again by the year-end.
The headline consumer price index (CPI) dipped 0.12 percent month-to-month (mtm) in September to 105.93 points, marking the steepest decline since 2020, interim Statistics Indonesia (BPS) head Amalia Adininggar Widyasanti said on Tuesday.
The CPI has declined for five consecutive months since April, driven by falling fresh food prices. Red chilies, chicken eggs, poultry meat and tomatoes were among the commodities that saw notable price decreases due to increased supply from farms.
Other factors included easing monthly pressure from a hike in school fees.
“The September index drop is primarily due to lower production costs on food and livestock and ample supply from the harvest season,” Amalia said.
Annual inflation eased from 2.12 percent in August to 1.84 percent in September, the lowest rate since November 2021 but still within the inflation range of 1.5-3.5 percent targeted by Bank Indonesia (BI).
Food commodities, especially rice, sugar and cayenne pepper were among major contributors to annual inflation. Meanwhile, the prices of big red chilies, eggs and poultry meat saw an annual decline.
Annual core inflation, which reflects change in the prices of goods and services except food and energy, increased slightly to 2.09 percent in September, from 2.02 percent in August.
Room for another cut
According to analysts, the slowing annual inflation rate over the past months could give BI room to cut its benchmark interest rates after taking into account other factors, including the rupiah exchange rate and the decision of the United States Federal Reserve (Fed).
The central bank lowered its benchmark BI-Rate by 25 basis points (bps) to 6 percent in September, the first time it has done so in over three years, hoping it would bolster domestic economic growth.
The central bank’s decision came just hours before the Fed announced its much-anticipated 50 bps rate cut, its first in four years.
Josua Pardede, chief economist at private lender Bank Permata, forecast that the annual inflation rate would hover below 2 percent this year, far lower than 2.81 percent last year.
“The inflation outlook may provide room for Bank Indonesia to lower the BI-Rate in response to potential Fed rate cuts,” he told The Jakarta Post on Tuesday.
Josua added that inflationary pressures were likely to stay subdued for the remainder of 2024.
He also noted that the government had opted to postpone imposing excise duties on plastics and sugar-sweetened beverages, which could hurt purchasing power and consumer spending.
Meanwhile, the country’s CPI would benefit from a reduction in imported inflation risks, Josua said, as the rupiah was projected to continue appreciating against the greenback. This was particularly due to expectations that the Fed would cut its rate further by the end of this year, which could improve risk-on sentiment and allow emerging economies like Indonesia to attract more capital inflows.
Bank Danamon economist Hosianna Evalita Situmorang said in a statement on Tuesday that September’s inflation data could provide BI a solid footing to lower its benchmark interest rate by a further 25 bps by the year-end. This was in line with expectations that the Fed could lower the fed funds rate by 25 bps each in November and December.
“Additional positive catalysts include the stabilization of global oil prices and the resilience of the rupiah exchange rate, despite heightened geopolitical tensions in the Middle East,” she said.
The central bank made its first rate cut in September after embarking on a rate-hiking cycle in August 2022, which lifted the domestic benchmark for borrowing costs by 250 bps to a high of 6.25 percent in April 2024.
BI Governor Perry Warjiyo forecasts a Fed rate cut of 25 bps in both November and December as well as four more cuts next year amid eased inflation and weakened job growth in the US, which market players have interpreted as a signal for the Fed to move toward “faster and bigger” cuts.