Bank Indonesia Sees Easing Global Pressures & Controlled Inflation
The central bank of Indonesia (Bank Indonesia) sees easing pressures in the global economy in May 2016, reflected by the rising crude oil price. On Thursday (26/05), crude futures exceeded the USD $50 per barrel level for the first time since November 2015 (supported by production disruptions in Canada). Although oil futures declined again the following day on profit taking, the rising trend has persisted. In early 2016 crude oil traded below USD $30 a barrel, plunging some 21 months due to the global supply glut and weak global economic growth.
However, analysts argue it may be difficult for crude oil to climb significantly beyond the USD $50 per barrel level given the rising price may encourage North American producers to boost their shale oil output. Market players are now awaiting next week's Organization of Petroleum Exporting Countries (OPEC) meeting in Vienna to learn whether the involved oil producing states will decide to support prices. However, a production freeze is not likely given Iran, which returned to the world markets in January 2016 after Western-imposed sanctions were lifted, is reluctant to cut crude output.
Bank Indonesia Governor Agus Martowardojo regards the rising oil price trend as an indicator that the global economic conditions are improving. An improving global economy will also have a positive impact on emerging markets, including Indonesia.
Federal Reserve's Monetary Policy
Another 'storm' that seems to have blown over is the June US Federal Reserve interest rate hike issue. After the Federal Reserve's hawkish April minutes were released on 18 May, many market players believed that the Fed would announce another Fed Funds Rate hike in June. This immediately triggered a storm on the international financial markets with emerging markets being the main victims of capital outflows. The Indonesian rupiah, for example, depreciated 2.2 percent to IDR 13,587 per US dollar between 17-27 May.
Indonesian Rupiah versus US Dollar (JISDOR):
| Source: Bank IndonesiaHowever, as we approach the end of May markets have somewhat calmed about the possibility of a June Fed rate hike. Past Friday Fed Chairwoman Janet Yellen stated that the Federal Reserve should raise interest rates in the coming months provided the economy picks up in line with expectations and jobs continue to be generated. Most analysts now believe that an interest rate hike will be concluded at the Fed's July policy meeting (26-27 July). The probability of a July US rate hike rose to 60 percent, nearly double the estimate from one month ago.
After the US central bank raised its key interest rate in December 2015 - the first US interest rate hike in almost a decade - it has held off from another rate hike due to concern about sluggish global economic growth and financial market volatility.
Britain & European Union: Brexit?
Bank Indonesia Governor Martowardojo also sees shrinking chances of Britain exiting the European Union, the so-called 'Brexit' (UK voters will head to the polls on 23 June 2016 to vote in a referendum whether or not to leave the EU). This has resulted in easing pressures on the pound sterling over the past couple of days, implying that turmoil on the international money markets has also somewhat subsided. Most analysts agree a Brexit would hurt Britain's GDP and household income.
Indonesia's May Inflation
Regarding Indonesia's May inflation rate, Martowardojo said a central bank survey shows that monthly inflation stood at 0.19 percent up to the fourth week of May, or 3.3 percent on an annual basis (from 3.60 percent y/y in April 2016). Easing inflation in Indonesia is supported by controlled food prices (chilies, rice, onions and beef). However, prices of chicken meat have risen ahead of the Ramadan and Idul Fitri celebrations (June-July) that always cause additional inflationary pressures in Southeast Asia's largest economy. Bank Indonesia remains optimistic that its full-year inflation target (3 - 5 percent y/y) will be achieved.
Inflation in Indonesia:
| Month | Monthly Growth 2013 |
Monthly Growth 2014 |
Monthly Growth 2015 |
Monthly Growth 2016 |
| January | 1.03% | 1.07% | -0.24% | 0.51% |
| February | 0.75% | 0.26% | -0.36% | -0.09% |
| March | 0.63% | 0.08% | 0.17% | 0.19% |
| April | -0.10% | -0.02% | 0.36% | -0.45% |
| May | -0.03% | 0.16% | 0.50% | |
| June | 1.03% | 0.43% | 0.54% | |
| July | 3.29% | 0.93% | 0.93% | |
| August | 1.12% | 0.47% | 0.39% | |
| September | -0.35% | 0.27% | -0.05% | |
| October | 0.09% | 0.47% | -0.08% | |
| November | 0.12% | 1.50% | 0.21% | |
| December | 0.55% | 2.46% | 0.96% | |
| Total | 8.38% | 8.36% | 3.35% |
Source: Statistics Indonesia (BPS)
Inflation in Indonesia and Central Bank Target 2008-2015:
| 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | |
| Inflation (annual percent change) |
9.8 | 4.8 | 5.1 | 5.4 | 4.3 | 8.4 | 8.4 | 3.4 |
| Bank Indonesia Target (annual percent change) |
5.0 | 4.5 | 5.0 | 5.0 | 4.5 | 4.5 | 4.5 | 4.0 |
Source: Bank Indonesia