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UPDATE 1-Indonesia August inflation slips to new 20-year low

* Aug inflation +1.32% y/y, vs +1.40% in poll

* C.bank targets 2%-4% inflation in 2020

* C.bank benchmark rate at 4% now, having been cut 4 times ytd (Adds comments by economists)

JAKARTA, Sept 1 (Reuters) - Indonesia’s inflation cooled further in August and hit a new 20-year low, marking a third month the rate came in below the central bank’s target range, as the COVID-19 pandemic hurt demand in Southeast Asia’s largest economy.

Some economists say the weak inflation reading reflected the scale of the downturn caused by the pandemic, but they noted the central bank may not be eager to cut rates further.

The August annual inflation rate eased to 1.32%, the slowest since May 2000, from 1.54% the previous month, data showed on Tuesday. A Reuters poll had expected 1.40%.

Bank Indonesia’s (BI) target range is between 2% and 4%.

The annual core inflation rate was 2.03% in August, a touch below July’s 2.07% and roughly in line with market expectations.

The August data confirmed Bank of America Securities’ view that Indonesia’s economic condition would remain soft this year and may only return to pre-pandemic levels in the second quarter of 2021, its economist Mohamed Faiz Nagutha wrote in an email, giving an estimate of inflation at just above 1% by year-end.

“On monetary policy, BI has recently made it clear that it prefers to rely on quantitative easing measures to support the economy rather than interest rate cuts,” he said, although he sees room for 25 to 50 basis points (bps) more reduction in the current easing cycle.

BI has slashed its benchmark rate four times totalling 100 bps to 4.00% this year and bought a large amount of government bonds in response to the economic fallout of the pandemic.

The economy contracted 5.32% on-year in the second quarter, the first such shrinkage since 1999, and authorities have warned of a looming recession.

“Weak growth and inflation dynamics call for further policy support,” ANZ economists wrote in a note, but highlighted that BI has preferred quantitative easing over rate cuts.

BI’s next policy meeting is scheduled on Sept. 16-17. (Reporting by Gayatri Suroyo and Fransiska Nangoy; Editing by Jacqueline Wong and Amy Caren Daniel)

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