Macroscope : Easing inflation points to another rate hike pause - Mandiri

Consumer price fell 0.31% mom (+6.16% yoy) in April, deeper than our and consensus expectations for deflation of around 0.15% mom (+6.32% yoy). Declining food prices and the rupiah appreciation have helped curb inflation in the last two months. However, core inflation continued to print higher number at 4.62% yoy in Apr11, which with strong growth in imports, pointed out to rising demand pressure to the inflation. Thus, we think further policy tightening is needed to keep inflation expectations in check.

Given low inflationary pressure so far this year of only around 0.39% ytd and fuel consumption rationing delayed, there are reasonable downside risks to our forecast. However, as global commodity prices remain high and domestic demand pressure will continue to be strong, we keep our inflation projection at 6.6% for YE11 and expect another policy tightening in the course of the year. Yet, as capital inflows to remain strong, the central bank may opt to leave the policy rate unchanged in the next board meeting (12 May). We expect the next rate hike will be in June the earliest by another 25bps for the rest of the year.