Core inflation to cool to below 4% in 3Q23: Bank Indonesia

  • Bank Indonesia (BI) has projected that core inflation, which reflects demand-pull effects on prices, will return to a target range of below 4% from 3Q23, a significant downward revision after inflation was projected to hit 4.6% by end-2022.
  • Wahyu Agung Nugroho, BI’s economic and monetary policy director, told a media briefing that the rise in core inflation to 4.6% was unavoidable, but that his assessment showed it would be temporary.
  • Soaring fuel prices and their second-round effects – an indirect inflationary impact that increases the prices of goods and services and hence, wages – had indeed dented inflation expectations, Wahyu said, as the two factors had added between 1.8 and 1.9 percentage points to the inflation baseline.
  • “We believe core inflation will be above our 4% target by end-2022. We will continue the efforts to control it, so it will not affect inflation expectations too much,” he said.
  • Wahyu also explained that the higher-than-expected 50 bps hike had more to do than controlling inflation. BI was anticipating weaker transmission from its monetary policy to the yield of debt instruments due to excess liquidity in the market.
  • A higher rate hike was therefore needed to meet investor expectations on Indonesian yields, Wahyu explained, and this would greatly help in attracting more investors to contribute to capital inflows to the country.
  • “Before COVID-19, the relationship between the benchmark rate hike and government bond yields was one to one. If we hike the rate by 25 bps, then yields would increase the same amount. But with excess liquidity, this was no longer the case,” he said.

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