Economy:Easing inflation and RR policy will pause rate hike - Mandiri Sekuritas

Inflation came softer at 0.13% mom in Feb11 or 6.84% yoy driven by food and clothing price deflation. The figure is lower than our and consensus estimate of 0.4% mom. On cumulative basis, inflation was 1.02% in the first two-months of the year. Meanwhile, core inflation, inflation excluding food and energy, increased to 4.36% yoy in Feb11 from 4.18% yoy a month earlier.

Rising core inflationary pressures may tempt people to expect further rate hike by the central bank. However, given the non-interest rate monetary policy that will start to take into affect on March namely loan-to-deposit ratio (LDR) linked reserves requirement (RR) and higher RR for foreign exchange deposit, we think, the benchmark rate will be kept flat at 6.75% in the next board meeting on Friday (4/3).

At this juncture, we maintain our inflation forecast at 6.6% yoy as we still factor in the fuel consumption rationing this year. Thus, we only expect another 25-bp increase in interest rate in 2011, which will be delivered in 2Q11 to anticipate the rising inflation expectations triggered by the implementation of fuel consumption limitation policy.

Indonesia trade surplus fell to US$1.9bn in Jan11 from its highest level of US$3.7bn in December. Deterioration in trade surplus was trigger by slower export growth that grew by 24.7% yoy, while imports recorded impressive 32.2% yoy growth during the month. Yet, we think it is too early to conclude that the trade surplus is sharply deteriorating given Dec10 outstanding increase in trade surplus.