Indonesia Inflation Slows to Least in 7 Years, Misses Target (1)

(Bloomberg) -- Indonesia’s inflation slowed to the weakest in almost seven years and fell below the central bank’s target, bolstering the case for further interest-rate cuts.

Consumer price gains eased to 2.79 percent last month from a year earlier, compared with economists’ 3.02 percent estimate. Prices fell 0.02 percent in August from the previous month, the statistics office said at a press conference in Jakarta on Thursday, adding that the annual rate was the lowest since December 2009.

Bank Indonesia still sees room to ease policy considering the economy has a manageable inflation rate and current-account deficit, Senior Deputy Governor Mirza Adityaswara said last week. The authority set its 2016 inflation target at 3 percent to 5 percent and expects consumer-price gains to end the year at around 3.5 percent, he said.

“Easing inflation, along with stability in both the current account deficit and exchange rate, have created policy space for rate cuts,” said Weiwen Ng, an economist at Australia & New Zealand Banking Group Ltd. in Singapore. “The degree of easing will be dependent on the size of tax amnesty inflows.”

ANZ expects the central bank to lower its new benchmark rate by another 25 basis points to 5 percent as soon as its September meeting, Ng said.

Indonesia’s 10-year bond yield slid four basis points to 7.07 percent as at 1:03 p.m. in Jakarta, set for the biggest daily gain in three weeks. Shares fell, with the Jakarta Composite Index extending its drop to 0.9 percent and set for the lowest close since Aug. 15.

Falling airfares, inter-city transport costs and cheaper food were the biggest factors driving the monthly drop in prices, Sasmito Hadi Wibowo, a deputy at the national statistics office, said in Jakarta.

(Updates with market reaction in 6th paragraph.)

To contact the reporters on this story: Herdaru Purnomo in Jakarta at hpurnomo1@bloomberg.net, Yudith Ho in Jakarta at yho35@bloomberg.net. To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Chris Bourke, Thomas Kutty Abraham

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