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As Indonesia navigates the energy shock, authorities are confronting shifting inflation dynamics, capital flow volatility, and exchange rate pressures. Bank Indonesia held the benchmark rate unchanged at 4.75% on Wednesday, along expectations. Compared to regional peers, we had placed Indonesia in the middle camp (see note link), not expecting policymakers to face immediate pressure to tighten, instead providing them the headroom to prioritize financial market stability. Besides seasonal drivers, the rupiah remains under pressure on fiscal sustainability concerns and MSCI-related doubts, despite the latter delaying the review from May to June 2026. The index provider also cautioned that major Indonesian stocks which have tightly held ownership might be removed from the indices. On oil, with this shock being primarily supply-driven, monetary policy would be a blunt tool to address the economic fallout in the short-term, expecting the BI to stay on an extended pause. We see two pre-conditions for the BI to shift to a tightening bias, firstly, sharp depreciation pressures on the currency, and secondly, an increase in the domestic administered subsidised fuel prices, which could generate both direct and second-round price pressures, and take inflation beyond the official target range.
To help better align offshore NDF with onshore pricing, BI intends to relax its restriction on domestic banks’ participation in the NDF market. Selected primary dealers, particularly those that play a key role in the money markets and foreign exchange, might be allowed to sell in offshore NDFs. Meanwhile, to draw in foreign inflows, 12M SRBI rates are hovering at 100bp above the benchmark rate, helping to increase the share of non-resident inflows to 17-18% of outstanding issuance vs ~12% in late-2025. Separately, authorities have begun to pass on part of the fuel price increase to the consumers, for instance raising the non-subsidised LPG products by ~18%, a first change since the last reduction in November 2023. In addition, other non-subsidised fuel products like Pertamax Turbo, Dexlite etc were raised by 45-65%, while the subsidized prices remained steady. Given that a smaller proportion of the population uses the dearer variants, impact on inflation is not expected to be significant (Dep Gov estimated less than 0.1%ppt), though second round effects should be noted.
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