According to a Bank Indonesia report that was released on Monday (19/08), consumer confidence in Indonesia has weakened after the government decided to raise prices of subsidized fuels in June 2013. The country's consumer confidence index fell 8.7 points to 108¹ in July from 117 points in June. Higher fuel prices led to higher transportation costs that subsequently made many retailers increase prices of products, thus impacting on Indonesian households' purchasing power. In July, the annual inflation rate accelerated to 8.61 percent.

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Indonesia's central bank, Bank Indonesia, decided today (15/08) to keep its benchmark interest rate (BI rate) at 6.50 percent. In recent days, heavy speculation emerged about whether Bank Indonesia would raise the BI rate for the third consecutive time in three months as the country is plagued by higher inflation (8.61 percent year-on-year in July 2013) and a weakening rupiah. Reluctance to raise the interest rate again seems to indicate that the Bank gives priority to economic growth, which has slid to a three-year low at 5.81 percent in Q2-2013.

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Indonesia's central bank expects that the country's monthly inflation rate will ease to below one percent in August. However, in order to meet this expectation the bank stresses that there needs to be an improvement in the food product supply through imports and good distribution practice. The latter, particularly, is problematic due to Indonesia's lack of quality and quantity in infrastructure. In July, monthly inflation rose 3.29 percent due to the start of the new school year and impact of higher subsidized fuel prices.

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Data from Indonesia´s central bank, Bank Indonesia, indicate that Indonesia´s retail sales grew 14.8 percent in June 2013 compared to the same month last year. The growth was higher than expected. Previously, a survey among Indonesian retailers showed that a growth rate of 10.8 percent was expected in June. In May 2013, retail sales had climbed about 12 percent (YoY). As such, these numbers are evidence of growing domestic consumption led by the country´s rapidly expanding middle class.

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Although it was clear that Indonesia would see a high inflation rate in July 2013 as the impact of higher fuel prices would kick in, Indonesia's central bank (Bank Indonesia) was surprised to see the figure go up to 3.29 percent. Currently, Indonesia's annual inflation rate stands at 8.61 percent. Bank Indonesia's governor Agus Martowardojo said that this rate is far outside the central bank's target range and announced that the institution expects annual inflation to stay above 8%  throughout 2013, higher than its previous assumption of 7.8% at end-2013.

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Today (02/08), Indonesia's bureau for statistics announced that economic growth of Indonesia in the second quarter of 2013 reached 5.81 percent (YoY), which is the lowest growth rate since Q3-2010 and also lower than most analysts as well as the Indonesian government expected. The GDP figure reflects Indonesia's cooling economy. For the fourth consecutive quarter, the rate has weakened as the country has been under pressure: high inflation, a widening trade deficit and a weakening rupiah.

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The Indonesian government assumes that the recently increased prices of subsidized fuels will translate into lower oil imports from the third quarter of 2013. Lower oil imports will result in lower demand for foreign currencies and, as such, will support Indonesia's currency, the rupiah. The value of the IDR rupiah is also influenced by market participants' expectation of inflation. Indonesia's central bank (Bank Indonesia) projects inflation to rise to 2.77 percent in July, and to slow down to 1 percent in both August and September.

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According to Finance minister Chatib Basri, the Indonesian government expects the country's gross domestic product (GDP) to have grown by 6.1 percent in the first six months of 2013. This forecast falls short of the government's 6.3 percent GDP growth assumption in the state budget (APBN). Basri stated that the lower outcome is due to global factors, such as slowing economic growth in China and India. But the government's assumption is more optimistic than the forecast of the central bank, which expects growth between 5.1 and 5.9 percent.

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Although Indonesia's currency, the IDR rupiah, has continued its weakening trend, Indonesian authorities are reassuring the people that this development is not as much caused by domestic factors but rather due to the rising US dollar against other currencies. According to data from Bank Indonesia, the Indonesian rupiah has weakened 5.99 percent to the US dollar in 2013. It is also clear that the central bank of Indonesia has decided to let the rupiah depreciate gradually instead of using its foreign exchange reserves to support the currency.

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According to various analysts and the central bank of Indonesia, the weakening of the IDR rupiah should not be too alarming as there currently is a global trend in which currencies, worldwide, weaken against the US Dollar. This situation is triggered by the economic recovery that has been experienced by the world's largest economy recently. Compared to other ASEAN members, the rupiah's decline is normal. The central bank adds that foreign capital inflows will return and will strengthen the country's currency.

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The Jakarta Composite index (Indonesia's benchmark stock index or IHSG) fell on Monday (11/11) amid mixed Asian markets. Not even positive finishes on Wall Street last Friday (08/11) were able to support the IHSG. Most investors seem to be waiting for results of Bank Indonesia's Board of Governor's Meeting which is scheduled for Tuesday (12/11). This meeting will provide answers about the central bank's view of the domestic economy and whether it thinks another adjustement of the BI rate is necessary.

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Indonesia's October inflation rate was well-received by investors. On Friday (01/11), Statistics Indonesia (BPS) announced that the country's inflation in October 2013 grew 0.09 percent. Easing inflation was mainly due to falling prices of raw foods and clothes. Year-on-year (yoy), however, Indonesia's inflation is still high at 8.32 percent, although showing a moderating trend from 8.40 percent (yoy) in September 2013 and 8.79 percent (yoy) in August 2013. Inflation had skyrocketed after subsidized fuel prices were raised by an average 33 percent in June.

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Forecasts for Indonesia’s gross domestic product (GDP) growth in 2013 and beyond have been revised down by all institutions, including the Indonesian government and central bank as well as international organizations such as the World Bank and the International Monetary Fund (IMF). Initially, the country’s economic growth was expected to reach around 6.5 percent in 2013. However, most institutions have downgraded forecasts for the country’s economic growth to below the 6.0 percent mark.

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Today (18/10), the Governor of Bank Indonesia and the Chairman of the Indonesian Financial Services Authority (OJK) signed an agreement concerning “cooperation and coordination to support task implementation at Bank Indonesia and OJK”. The agreement forms a basis for expediting and optimising coordination between both organisations in terms of their function, task and authority in light of the upcoming transfer of the banking regulation and supervision function from Bank Indonesia to OJK on 31 December 2013.

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On 12 October 2013 Finance Minister and Central Bank Governors from Korea and Indonesia agreed to establish a bilateral KRW/IDR swap arrangement in the near future. The size of the swap arrangement is up to KRW 10.7 trillion/IDR 115 trillion (equivalent to USD $10 billion). The effective period of the facility will be three years, and could be extended by agreement by both sides. This Bilateral Currency Swap Arrangement (BCSA) aims to promote bilateral trade and further strengthen financial cooperation, an objective of mutual interest to both countries.

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Although Indonesia's benchmark stock index (IHSG) started mixed on Wednesday (09/10), it gradually climbed as the trading day moved on. The country's benchmark interest rate (BI rate), which was kept at 7.25 percent by Bank Indonesia on Tuesday (08/10), continued to make a positive impact. However, negative market sentiments were brought on by the US shutdown as well as the downgrade of the IMF's outlook for world economic growth in 2013 and 2014. Lastly, the weakening IDR rupiah also implied negative market sentiments.

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Bank Indonesia’s Board of Governors decided to hold the BI Rate at a level of 7.25 percent, with rates on the Lending Facility and Deposit Facility held respectively at 7.25 percent and 5.50 percent. Bank Indonesia will continue to monitor global and domestic developments and further synergise the monetary and macroprudential policy mix in order to ensure that inflationary pressures remain under control, that rupiah exchange rate stability is maintained according to its fundamentals and the current account deficit is reduced to a sustainable level.

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After three months of high monthly inflation rates, Indonesia's inflation eased in September due to falling prices of food, transportation, communications and financial services after the Muslim celebrations of Idul Fitri, which always cause a spike in inflation, have passed. In September 2013, Indonesia posted deflation of 0.35 percent. It was the first time in 12 years that the country posted deflation in this month. The annual inflation rate eased to 8.40 percent from 8.79 percent in August 2013.

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Inflationary pressures eased in September 2013 to a 0.35% rate of deflation (mtm), or 8.40% (yoy). The rate of deflation exceeded the projections contained within the Price Monitoring Survey conducted by Bank Indonesia and much lower than inflation expectations by some analysts. Abundant supply in the wake of horticultural harvests (shallots and chilli peppers), triggered a deep correction in food prices. In addition, sliding beef prices also exacerbated further deflationary pressures, with volatile foods recording deflation of 3.38% (mtm).

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Investors are eagerly waiting for the release of Indonesia's September inflation rate. Indonesia has been hit by high inflation since the government decided to increase prices of subsidized fuels at the end of June. High inflation limits its people's purchasing power and as domestic consumption accounts for about 55 percent of Indonesia's economic growth, it thus impacts negatively on GDP growth, particularly after Bank Indonesia raised its benchmark interest rate (BI rate) from 5.75 to 7.25 percent between June and September.

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