Rate Hold Expected as Bank Indonesia Eyes H2 Trade Risks
With headline inflation still well-contained, core pressures softening, and the economy showing signs of resilience, Bank Indonesia is expected to keep rates on hold. Further easing may come later in H2—but only if external risks re-intensify or domestic growth falters.
Indonesia’s central bank is expected to hold its benchmark rate steady at 5.25% in its upcoming policy meeting, maintaining a cautious stance after delivering three rate cuts earlier this year. While headline inflation accelerated to 2.37% y/y in July—up from 1.87% in June—price pressures remain broadly within the Bank’s 2.5% ±1% target band, and underlying trends continue to justify a pause.
The July inflation uptick was almost entirely driven by a sharp rise in food prices, which surged 3.75% y/y and contributed 1.08 percentage points to the headline CPI. In contrast, core inflation—often a more reliable gauge of demand-side pressures—fell to 2.32% y/y, a seven-month low. This divergence suggests that broader inflationary momentum remains muted, supporting the view that Bank Indonesia (BI) can afford to be patient.
The recent rate cut in July, which lowered the benchmark BI-Rate to 5.25%, was motivated by the need to support growth amid subdued inflation and favourable FX conditions. Since then, the rupiah has remained stable, and Indonesia’s external balance has been reinforced by strong trade surpluses—buying BI space to calibrate future policy moves. However, the decision surprised markets and has likely raised the bar for further near-term easing.
From a growth perspective, Q2 GDP surprised to the upside at 5.12% y/y, driven by a strong rebound in investment and steady household consumption. The result keeps the economy on track to meet the government’s 5% annual target. But downside risks remain, particularly from global trade headwinds and the implementation of US tariffs starting August. Should exports soften meaningfully in H2, policymakers may revisit the easing cycle later in the year.
For now, BI is likely to pause and reassess. While the central bank has signalled room for further easing, it has also emphasised data dependence. A hold in August would allow more time to monitor global monetary conditions, especially the timing of a potential Fed rate cut, and to observe whether July’s food inflation pressures persist or fade.