Besides gasoline type of RON 90 (Premium) and diesel fuel price cut that had been announced in end of December 2015, the government also cut gasoline type RON 92, Pertamax and Pertalite, each by Rp.200/litre from Rp.8,650/litre to Rp.8,450/litre and Rp.250/litre from Rp.8,200/litre to Rp.7,950/litre. Meanwhile the final price cut for Premium and diesel fuel is Rp.150/litre from Rp.7,300 to Rp. 7,150/litre and Rp.750/litre from Rp.6,700.litre tp Rp.5,950/litre, respectively. The new prices will be effective on January 5, 2016.
The fuel price cut will affect around 19% of inflation weight from transport categories. However, the inflation pressure from raw food category may offset the deflation effect from these categories which in turn will not significantly affect the total inflation. Annual Inflation level will gradually increase this year after declining to an estimated 3% in end December 2015.
With the CPI inflation on lower trajectory, there is room for a downward adjustment to Indonesia’s benchmark rate. In our view, the CPI inflation will likely be on a decelerating path, as the world oil price is envisaged to stay low for another yearand given weak domestic demand. However, we are of the view that BI will also need to be mindful of external volatilities and its impact on the Rupiah. Thus, we envisage the benchmark rate to be maintained at 7.5% in the early policy meetings of 2015 but will likely be lowered to 7.0% in later this year.
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