ECONOMICS: March Inflation down 6.7% but Core Inflation up 4.5% - BI rate flat! - Credit Suisse

Robert’s macro forecasts are for GDP 6.0%-5.5%, Average CPI 7.5%-6.0%, therefore another 75bps increase and hence BI rate 7.50%-7.50% for 2011F-2012F respectively.

· Robert Prior-Wandesforde: March headline inflation move down (to 6.7% from 6.8%) and core inflation move up, although we had expected a bigger rise in the latter than the 4.4% to 4.5% increase that was reported. We are sticking with the view that Bank Indonesia will leave the policy rate unchanged for a second consecutive month when it next meets on 12 April.

· While the risks to our inflation projections (7.5% year average headline rate) are on the downside we continue to expect 75bps more of rate hikes by the end of the third quarter of this year. It is worth bearing in mind that even if BI were to match our rate expectations then Indonesia would probably deliver the smallest policy rate increase of any Asian country during the current tightening cycle. We expect the modest further policy tightening, which is unlikely to be passed on by commercial banks, to be triggered by the further move up in core inflation. The central bank has indicated that “it wouldn’t hesitate to act if the core rate breached 5%”. We would also note that the Indonesian economy will enjoy terms of trade benefits from higher oil and coal prices in contrast to most other Asian countries.