● CPI inflation of 0.1% MoM (6.8% YoY) in February was below market and our expectations, led by a pull back in volatile food prices. The government initiatives, along with the harvest seasons, are likely to help ease food price inflation in the near term.
● Core inflation resumed its rise to 4.4% YoY in February from 4.2% in January. Although still low by Indonesia’s standards, it has been gradually trending up in the past 12 months. We think the risk to core inflation remains to the upside.
● The fall in headline inflation, recent appreciation of the rupiah, and dovish comments from the Deputy Governor last week suggest that Bank Indonesia might pause this Friday.
● However, if core inflation continues to pick up as we expect, then BI would need to tighten monetary policy further in the coming months. We maintain our view that BI will hike rates by another 75 bp in the rest of 2011.