INDONESIA: Moderate Inflation, BI Can Support Growth But IDR Softer

September core inflation held at 2.2%, 0.3pp below April’s peak as domestic demand has softened. Headline was higher than expected at 2.65% though, highest since May 2024, up from August’s 2.3% due to higher volatile food prices and gold jewellery. Both measures remain well within Bank Indonesia’s (BI) 1.5-3.5% target band. There has been less focus on FX stability with three consecutive rate cuts to September as BI shifts to supporting growth. USDIDR is over a percent higher than the last BI meeting and the 22 October decision will show if FX is regaining focus. 

• The IDR has also weakened against other currencies with the BIS NEER 0.7% lower since 17 September rate cut.
• JP Morgan continues to forecast 25bp BI rate cuts in October and November given its shift to supporting growth and inflation is currently within its band. JP Morgan also believes it will want to ease before base effects push headline above target in early 2026 but if “growth pressures persist early next year, the central bank may look past the temporary surge in headline CPI and lean on the weak core CPI profile to deliver more easing”.
• Higher volatile food prices contributed to the pickup in headline in September with the 6.4% y/y increase in food prices driven by rice, chili and shallots. JP Morgan notes that unseasonably wet weather has impacted planting.
• Indonesia’s headline and core inflation while moderate are above the non-Japan/China Asian aggregates which were around 1.8% in August but rates at 4.75% also tend to be higher.

IDR