January 05, 2025

The Continuing Disinflation

Market Commentary

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Recently, there was concern regarding BPS-Statistics Indonesia's announcement about the discontinuation of the "Economic Indicator" publication starting January 2025.

This led to speculation that certain economic data might be removed from their website. However, BPS clarified that previously published data will remain accessible through the "Statistics by Subject" section on their website.

This change is part of BPS's ongoing efforts to enhance data dissemination and user accessibility. By consolidating information under specific subject categories, BPS aims to streamline access to statistical data, ensuring users can efficiently find the information they need.

This came to investors attention as recently Indonesia announced its inflation rate.

Indonesia's annual inflation rate ticked up to 1.57% in December 2024, up from 1.55% in November. This figure fell below both market expectations of 1.60% and our projection of 1.75%. On a monthly basis, consumer prices rose by 0.30%, compared to a 0.08% increase in November.

Most components such as food, housing, recreation & culture, education and accomodation saw price increases. Meanwhile, transport and communication prices declined.

Core inflation remained at 2.26%, marking a 16-month high, yet still below estimate of 2.28%. Monthly inflation rose by 0.44%, the highest in nine months, aligning with forecasts.

The latest inflation data indicates a continued trend of disinflation heading into 2025. The government's decision to cancel the planned VAT hike for January 2025 supports this outlook, easing BI's task of managing inflationary pressures. External factors are also expected to provide relief, as U.S. President Trump’s energy policies and efforts to de-escalate geopolitical tensions with Russia could drive down Brent crude oil prices, further mitigating energy-related inflation.

Lower inflationary pressures are likely to enhance the attractiveness of Indonesia’s government bond yields for both domestic and foreign investors. Favorable real yields should help maintain rupiah stability amidst ongoing uncertainties over the Federal Reserve’s rate-cut trajectory, especially after Chair Powell indicated fewer rate cuts than previously expected for 2025.

USDIDR Exchange Rate

As seen from the USD/IDR exchange rate chart, the rupiah continues to weaken. This is very concerning, as a weaker exchange rate can exert selling pressure on the equity market. When a country's currency depreciates, capital gains can be offset by currency depreciation, making the equity market of that country less appealing.

BI is likely to focus on strengthening the rupiah by ensuring that short-term government securities (SRBI) remain attractive to foreign investors. We recommend that investors monitor the strength of the rupiah closely before taking a more aggressive stance toward the equity market.

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