Mandiri Sekuritas Economy:Stable core inflation will hold off benchmark rate hike

Inflation registered at 0.89% mom in Jan11 or 7.02% yoy, higher than our and consensus estimates of 0.57% mom and 0.71% mom respectively. Rising prices of raw food components remained as the culprit on the headline inflation last month, while core inflation was stable at 4.18% yoy.

There were indications of wage-increase induced inflation (i.e. housing rental, maid wages, and doctor fee) that potentially drive demand. However, we found that the increase remained in line with seasonal pattern. Stable wholesale price (WPI) inflation in Jan11 and ample trade surplus in Dec10 also indicated there is no excessive inflationary pressure coming from the demand side.

We think the stable core inflation figure will allow the central bank to hold off rate hike. We think the central bank will wait for more evidence of rising demand before it initiates the rate hike cycle, which we believe could be triggered by fuel consumption capping starting in Apr11. At this juncture, we maintain our view that the first rate hike will be delivered in 2Q11 of a total 50bps to 7% this year. Earlier rate hike may happen if the currency is under pressure.

Indonesia total exports broke another record high reaching US$16.8bn (25.7% yoy) in Dec10, as commodity price continued to surge.  Imports hovered around US$13.1bn, resulting in hefty trade surplus of US$3.7bn jumped from US$2.1bn month earlier. Overall, Indonesia’s trade surplus rose to US$22.1bn in 2010 from& nbsp;&nb sp; US$19.7bn in 2009.