Disinflation persists

Following two rate cuts in August and September, Bank Indonesia (BI) suggested it was done fornow, but that future easing would be contingent on inflation. Weeks later, Indonesian PresidentJokowi claimed that success in taming consumer prices provides room for further rate reductions,while judiciously emphasizing that this is up to the central bank to decide (Bloomberg, 20October). A slight deceleration in October CPI data - even if this is a small change whenconsidering the volatile long-term trend in Indonesia's CPI - reaffirms that further limited easing isstill a possibility, but this is contingent on the growth outlook...

    Fortunately, all signs suggest that cyclical conditions have rebounded from 1H17. Cementconsumption, motorcycle sales, and loan growth have improved. What's more is that thegovernment is likely to accelerate spending on infrastructure and services into year-end as it hopesto catch up on 2017 spending targets (currently tracking sub-95% budget realization). Even totaland foreign investment realization picked up in 3Q (the latter has seen a particularly subdued trendin recent years). All in all, pretty rosy in the short term. Indeed, we expect 3Q GDP, to be releasedon Monday 6 November, to show only a modest acceleration from the subdued 5.0% y-o-y pace in1H17.

    Recently, officials from the government and central bank have come out expressing optimism.

    Earlier this week, Finance Minister Sri Mulyani revealed expectations for growth to possibly beatthe 5.4% growth assumption in the 2018 budget, due to her view that investment growth willtranscend the government's assumptions (Bloomberg, 30 October). This is not unrealistic. Totalinvestment realization grew 13.7% y-o-y in 3Q, and various large-ticket projects such as the Jakarta-Bandung High Speed Rail should sustain the momentum next year. BI, for its part, expectsgrowth to accelerate further to 5.3-5.4% in 4Q17, from an expected 5.1-5.2% in 3Q. In the same breath,BI Senior Deputy Governor Adityaswara stated that there is "diminished room for reducing rates"(Bloomberg, 31 October).