Indonesia’s MoM CPI inflation for March was 0.17%, the first positive print of 2015. This was caused primarily by adjustments to administered prices, which led to higher prices for (lowoctane) gasoline, diesel and 12-kg LPG canisters. While the sharp fall in crude prices, after the 30%-plus hike in administered prices in November 2014, allowed the government to cut retail prices in 2015, the recent hardening of crude prices and fairly strong depreciation of thecurrency (the IDR is the worst-performing Asian currency in 2015) forced the government to raise the retail prices of these products.Although inflation may yet moderate, the real policy rate is still quite low. Ideally, Indonesia should follow the same policy as it did last year – engineering an economic slowdown to contain the current account deficit. Any decision to stimulate the economy by cutting the policy rate would lead to increased demand for imports to meet domestic consumption demand, which would increase depreciation pressure on the currency. This may further erode investors’ confidence, triggering a significant flight of capital from the country. On the other hand, currency depreciation, in itself, is not helping Indonesia’s commodity-heavy exports. Add to that the Chinese slowdown, and the situation could deteriorate. Strong capital inflows (in search of yield) and the resultant balance of payments surplus in 2014 have failed to prevent the currency from depreciating. This exposes the inherent structural weaknesses in the economy.Also, with corporate debt accounting for more than half of Indonesia’s total external debt, a weakening currency could have a negative impact on corporate profitability. Therefore, analysts at Societe Generale believe that the BI would do well to keep the policy rate unchanged.
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