Indonesia's CPI inflation eased to 4.2% y-o-y in November, vs. 4.4% in October, but core inflation held steady. The decline in headline inflation was led entirely by food items, with other categories either steady or higher. Another policy rate cut is not needed, in our view, given the already highly accommodative monetary stance and the domestic orientation of economy. However, it's a close call given the BI's seeming inclination to guide rates lower.

Facts
November CPI inflation eased further to 4.2% y-o-y, vs. 4.4% in October, broadly in line with consensus and slightly below our forecast of 4.3%. On a seasonally adjusted basis, headline inflation rose to 0.6% m-o-m sa, vs. +0.1% in October, but eased to 2.7% 3m/3m saar, vs. 3.4% in October.

However, core inflation held steady at 4.4% y-o-y. In seasonally adjusted terms, sequential core inflation picked up to 0.4% m-o-m sa, vs. 0% in October, but slowed on a 3m/3m saar basis (1.8% vs. 3.8% in October) due to the high August base.

By category, the deceleration was exclusive led by food, with annual inflation declining for both raw foods (4.9% vs. 5.8% in October) and 'processed food, beverage & tobacco' (4.4% y-o-y vs. 4.7% in October). All other categories, however, either saw inflation hold steady or increase.

Implication
Headline inflation in Indonesia has been trending down in tandem with the significant drop since the start of the year in food inflation. However, this to some extent reflects base effects due to the 2010 jump in food prices. Moreover, sequential headline inflation picked up and annual core inflation held steady.

Moreover, as we have highlighted before, there are still upside risks to food inflation from higher rice prices associated with recent policy plans in Thailand to hike minimum support prices as well as the terrible floods plaguing Thailand. Moreover, the weaker exchange rate is lifting imported inflation.

It's also worth keeping in mind that growth is holding up well supported by loose monetary policy settings and the strong structural underpinnings for private consumption. This will effectively keep underlying inflation pressures simmering.

Nevertheless, the easing of headline inflation is going to be music to the ears of the dominating flock of BI doves, raising the risk that BI will surprise with another rate cut. The persistent uncertainty about the global economic outlook has only strengthened the BI's desire to pull the trigger again, although Indonesia's more domestically oriented economy makes it less exposed to global economic spillovers.

With monetary policy settings already highly accommodative and providing more than sufficient insurance against slower growth, a cut is not warranted in our view and it would add to inflation risks. However, the BI would appear itchy to guide policy rates lower, so it's a close call.

Bottom line: Combined wit the weaker global economic backdrop, the dip in November inflation is likely to further strengthen BI's inclination to keep it loose and it may even egg them on to consider yet another unnecessary rate cut.