Indonesia inflation to trend up in 2013

Headline inflation forecast at 6.0-6.5%.

OCBC Treasury Research noted:

The uptick seen in core inflation should be a rather telling sign that underlying inflationary pressure is creeping up, and this is consistent with our view that inflation should trend up into 2013, especially given the low base effects from this year.

The most important factor that has kept headline inflation low this year is the relatively low food prices but we should remember that this is not a given for 2013 and besides the threat of a possible fuel price hike is back in the picture.

As it is, despite the official inflation target being kept at 3.5-5.5% for 2013, we forecast headline inflation to actually be a tad higher in the 6.0-6.5% territory.

On broad expectations, this latest inflation reading should be a marginally negative read for IDR bond but sentiment in the market is likely to remain supported, given that there is still plenty of liquidity chasing for yields in EM, including in IDR bonds.

Meanwhile, we are encouraged by the fact that import growth has returned back to the positive territory.

The fact that the trade balance has recorded another surplus is also encouraging from the flows perspective, although we expect the figure to stay low into early 2013. We look for export growth to gain a stronger traction only towards the second half of 2013.

As much as the September data proved to be somewhat supportive for the IDR, note that we continue to see little impetus to push for any marked appreciation of the local unit at this juncture.