Indonesia's inflation edged up to 8.8%

Expect further policy tightening, warns analyst.

According to Bank of America Merrill Lynch, Indonesia's headline inflation edged higher to +8.8% in August, from +8.6% in July, slightly below expectations.

Here's more from BofAML:

On a month-on-month basis, inflation rose +1.1% in Aug, vs. +3.3% in July. Measures to boost supply of essential food items may have negated some inflationary pressures.

Core inflation increased more modestly to +4.5% in Aug (from +4.4%) from July. Pass-through from the fuel price hike to non-food and energy items has been limited so far.

"Double-digit" inflation likely by year-end

Inflation may peak at about +10%-10.5% in Dec or Jan (vs. Bank Indonesia's guidance of 9%-9.8% at year-end). The weak rupiah, which has declined some 12% against the US$ since May this year, will increase imported inflation.

A potential pass-through of about 15% from the currency will readily lift inflation to the double-digits by year-end. Past empirical studies find high pass-through for Indonesia.

We are also mindful of the risk from rising global oil prices and higher minimum wage.

BI hiked last week; expect further tightening

BI raised the main policy rate and FASBI by +50bps last Thurs to 7% and 5.25% respectively. The lending facility rate was also hiked by +25bps to 7%.

Given our higher inflation projections, we see another +50bps hike to the BI rate and FASBI, to 7.5% and 5.75% respectively.

Further monetary tightening is likely to curb inflation, stabilize the rupiah and reduce the current account deficit.

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