Indonesia CPI Review: CPI Moderates Making Room For Rate Cut
Indonesia’s inflation slowed further in May, while the country’s trade surplus narrowed to its lowest level in five years, deepening expectations that Bank Indonesia (BI) could pursue additional rate cuts later this year to cushion slowing domestic growth.
Headline inflation eased to 1.6% yr/yr in May, down from 1.95% in April, according to Statistics Indonesia (BPS). The monthly consumer price index fell 0.37%, marking the sharpest monthly deflation since September 2022, as post-Ramadan food prices declined and rice output surged. The food, beverage and tobacco group contributed most to May’s deflation, with falling prices for red chilies, cayenne, shallots, chicken and fish. Volatile food prices fell 2.48% m/m, while administered prices eased slightly. Core inflation moderated to 2.4%, reflecting stable domestic demand and contained underlying price pressures. Seasonal declines in food prices following the Ramadan-Idul Fitri period played a key role in the pullback, consistent with patterns seen in recent years. Price growth also eased across several other categories, including personal care and other services; restaurants; housing, water, electricity and household fuels; furnishings; health; and recreation.
In terms of contributions to annual CPI inflation, personal care and other services accounted for the largest share (0.59 percentage points), followed by food, beverages and tobacco (0.30 pps), and housing-related costs (0.24 pps).
At the same time, Indonesia’s trade surplus shrank to just US$160mn in April, and sharply lower than March’s US$4.33bn surplus. The April surplus was the smallest since April 2020, with a 21.84% surge in imports outpacing a 5.76% rise in exports. Capital goods imports from China and Singapore drove much of the jump, likely linked to temporary disruptions surrounding new U.S. tariffs and supply chain adjustments.
On the export side, shipments to the U.S.—one of Indonesia’s top trade partners—reached $2.08 billion in April but were partly impacted by Washington’s 10% tariff imposed earlier in the month. Mining exports declined more than 20%, reflecting weaker coal prices.
The weakening trade surplus, combined with softer inflation, is likely to reinforce BI’s dovish tilt. The central bank cut its benchmark rate by 25bp to 5.50% at its May meeting, its third cut since September, and signalled it remains ready to “monitor the space to help drive economic growth.” The Board’s language suggests further easing remains on the table as Q1 GDP growth slowed to 4.87% and external risks persist.
We expect BI to cut rates further, with some a terminal rate of 5% by mid-2026—still leaving policy moderately tight in real terms given the subdued inflation outlook. A key factor supporting the low inflation environment is rice production, which is expected to rise nearly 15% yr/yr in the first half of 2025, helping stabilize food prices.
For now, with inflation tracking near the lower end of BI’s 1.5–3.5% target range, and the rupiah broadly stable, conditions remain favourable for further cuts in Q3, provided global volatility remains manageable. However, with the U.S.-China tariff situation still fluid and global demand uncertain, BI is likely to remain cautious, balancing domestic support with external stability.