Indonesia’s March inflation fell to 3.5% year-on-year from 4.6% in February, with government stimulus offsetting base effects and Lebaran-related price pressures. Inflation is expected to return to normal from the second quarter as base effects pass.
Retail pump prices and non-subsidised fuel prices have not been raised, which is expected to limit inflation pressures. If global oil prices rise further, domestic fuel prices may face partial pass-through, which could add to inflation.
Bank Indonesia Policy Outlook
Bank Indonesia is expected to keep policy unchanged this month while monitoring financial market stability and rupiah movements. It is also watching the risk of higher subsidised fuel prices and the effect on inflation expectations.
The government announced energy conservation measures including a subsidised fuel cap of 50 litres per day and a 50% B50 rollout from July. Civil servants are to work from home once a week, except in strategic sectors, with lower vehicle use and reduced travel; the plan will be reviewed after two months.
Unsubsidised fuel prices were kept unchanged after expectations of a rise from 1 April. Changes to the Free meal programme (MBG) are projected to save about IDR25 trillion, or 0.1% of GDP.
We’re seeing a familiar pattern develop, with March inflation coming in at 3.9%, a bit hotter than the 3.5% print this time last year. Looking back at 2025, we remember that government stimulus and fuel price caps were key to offsetting those Lebaran-related pressures. The question now is whether they will follow the same playbook.
Market Volatility And Fuel Subsidy Risks
With Brent crude now pushing $95 per barrel, the pressure is much greater than what we saw in early 2025. The Rupiah weakening past 16,450 to the dollar adds to this stress, making it expensive to import fuel and defend the currency. Last year’s strategy of absorbing the shock looks less sustainable now.
This suggests Bank Indonesia’s patience may be wearing thin, unlike in 2025 when they remained on hold while monitoring the situation. We should therefore consider positioning for increased volatility in Indonesian interest rate swaps and the Rupiah exchange rate. Options strategies, such as buying straddles or strangles on the USD/IDR, could be beneficial ahead of BI’s next meeting.
The key trigger to watch for in the coming weeks will be any announcement regarding fuel subsidies, as we know this is a sensitive issue. A decision to pass even a portion of the higher oil costs to consumers would likely force BI to hike its policy rate, which currently stands at 6.25%, to anchor inflation expectations. This contrasts with their decision last year to hold off on unsubsidized fuel price increases around April 1st.
