DBS Group Research economist Radhika Rao notes Indonesia’s March inflation eased to 3.5% year-on-year as government stimulus offset base effects and Lebaran-related pressures. She expects inflation to normalise from the second quarter, with Bank Indonesia likely on hold while watching Rupiah stability and subsidised fuel risks. New energy conservation measures offer temporary fiscal relief but could prove insufficient if Oil prices rise further.
Benign inflation and fuel policy tradeoffs
“March inflation was relatively benign at 3.5% yoy from 4.6% in Feb as stimulus measures offset fading base effects.”
“Passage of base effects from 2Q will normalise inflation, with the absence of an increase in retail pump and non-subsidised fuel products expected to cap inflationary pressures.”
“For now, authorities have opted to absorb the initial shock from global energy prices to protect consumers’ purchasing power. However, a further rise in oil prices could increase the likelihood of partial passthrough to domestic fuel prices, potentially fuelling inflation and prompting a shift toward tighter policy.”
“The Indonesian government announced energy conservation plans on Wednesday, consisting of a) fuel rationing – subsidised fuel cap at 50l per day; 50% B50 rollout from July; b) civil servants to work-from-home once a week except in strategic sectors, alongside lower vehicle usage and reduced travel requirements, etc; c) review after two months; d) unsubsidized fuel prices held unchanged after initial expectations of an impending hike from 1 April; e) adjustments to the Free meal program (MBG) (potential savings: ~IDR25 trn; 0.1% of GDP).”
“BI is expected to stay on hold this month, while monitoring financial market stability, rupiah movements and risks of an increase in subsidised fuel prices (and consequent unanchoring of inflationary expectations).”
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)
Source: https://www.fxstreet.com/news/indonesia-inflation-and-energy-policy-risks-dbs-202604021708
