Indonesia’s March inflation eased to 3.5% year-on-year from 4.6% in February, as stimulus measures offset base effects and Lebaran-related price pressures. Inflation is expected to return to more typical levels from the second quarter as base effects fade.
Retail pump prices and non-subsidised fuel prices have not been raised, which may limit near-term inflation pressure. Bank Indonesia is expected to keep policy unchanged while monitoring financial market stability, rupiah movements, and the risk of changes to subsidised fuel prices.
Policy Measures And Near Term Inflation
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 outside strategic sectors, alongside reduced vehicle use and travel.
The measures will be reviewed after two months, and non-subsidised fuel prices were left unchanged despite expectations of a rise from 1 April. Adjustments to the Free Meal programme (MBG) are projected to save about IDR25 trillion, or 0.1% of GDP.
If global oil prices rise further, domestic fuel price adjustments may become more likely, which could add to inflation pressures.
The recent March inflation figure of 3.5% is deceptively calm, easing market worries after the inflationary pressures we saw through much of 2025. This gives Bank Indonesia cover to keep interest rates on hold at its next meeting, creating a short-term window of stability. For now, this suggests a stable environment for Indonesian assets.
Market Positioning And Hedging
Given this outlook, we see the Rupiah as the key pressure point, especially as it trades near 15,900 to the US dollar. With Bank Indonesia standing still while other central banks may signal future tightening, the interest rate differential is not in the Rupiah’s favor. Purchasing near-term USD/IDR call options could serve as a cost-effective hedge against any sudden currency weakness.
The current environment also makes receiving fixed rates on Indonesian interest rate swaps look attractive for the coming weeks. The market is not pricing in an imminent rate hike, offering a profitable carry trade. However, we remember how quickly BI shifted its stance in late 2025, so any positions must be monitored for changes in inflation expectations.
Our primary concern is the global oil market, where Brent crude prices have already climbed to around $95 a barrel, up over 10% since the start of the year. The government’s current policy of absorbing high fuel costs is not sustainable if oil pushes past the $100 mark. A forced pass-through of these costs to consumers would immediately re-ignite inflation.
To protect against this clear and present risk, we should consider building a defensive position through index options. Buying out-of-the-money put options on the Jakarta Composite Index (JCI) with a three-to-six month expiry is a prudent strategy. This provides a hedge against a market downturn that would likely follow any government decision to raise subsidized fuel prices.
