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INDONESIA: VIEW: JP Morgan Expects BI On Hold Until June Depending On Trade

INDONESIA
EM BulletAPACEmerging Market NewsBulletIndonesiaMarketsFixed Income Bullets

Bank Indonesia’s decision is announced today and is expected to leave rates at 5.75% given rupiah weakness against a range of currencies. Also with recent volatility, a rate cut may signal that the central bank has deeper concerns. JP Morgan expects BI to be on hold in March with IDR volatility and FX reserve drawdown making it hard to ease, but the risks are skewed towards a 25bp cut to “pre-emptively act amidst still-elevated US trade policy uncertainty”.

  • JP Morgan is forecasting a June rate cut “with the bias for more easing if global/domestic growth conditions deteriorate”.
  • “IDR volatility remains elevated, likely reflecting both regional (e.g., tariff overhang) and country-specific (e.g., lower commodity prices) concerns. February also recorded a US$1.6 billion drawdown in gross FX reserves as foreign portfolio outflows continue.”
  • “The latest export earnings retention rule (GR8/2025) could boost onshore US$ liquidity and provide the degree of freedom for BI to cut rates. However, the full, positive impact of GR8/2025 on reserve accumulation may only kick in starting June once the FX redemption pressure from the previous ruling subsides. While our baseline scenario projects a substantial increase in FX reserves (US$50 billion in gross; US$15 billion in net) in the next 12 months, much depends on compliance and enforcement, and as such, BI may also intend to monitor the effectiveness of GR8/2025.”
  • BI should “look through Jan-Feb CPI prints on temporary electricity tariff discount … We expect a payback in headline CPI prints, from 0.3%oya in Jan-Feb to 2.8%oya for the rest of 2025, with a full-year average of 2.3%, close to the mid-point of the 1.5-3.5% inflation target. In addition, core inflation momentum is on the rise, quelling concerns of weak demand-pull inflation for now.”
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Bank Indonesia’s decision is announced today and is expected to leave rates at 5.75% given rupiah weakness against a range of currencies. Also with recent volatility, a rate cut may signal that the central bank has deeper concerns. JP Morgan expects BI to be on hold in March with IDR volatility and FX reserve drawdown making it hard to ease, but the risks are skewed towards a 25bp cut to “pre-emptively act amidst still-elevated US trade policy uncertainty”.

  • JP Morgan is forecasting a June rate cut “with the bias for more easing if global/domestic growth conditions deteriorate”.
  • “IDR volatility remains elevated, likely reflecting both regional (e.g., tariff overhang) and country-specific (e.g., lower commodity prices) concerns. February also recorded a US$1.6 billion drawdown in gross FX reserves as foreign portfolio outflows continue.”
  • “The latest export earnings retention rule (GR8/2025) could boost onshore US$ liquidity and provide the degree of freedom for BI to cut rates. However, the full, positive impact of GR8/2025 on reserve accumulation may only kick in starting June once the FX redemption pressure from the previous ruling subsides. While our baseline scenario projects a substantial increase in FX reserves (US$50 billion in gross; US$15 billion in net) in the next 12 months, much depends on compliance and enforcement, and as such, BI may also intend to monitor the effectiveness of GR8/2025.”
  • BI should “look through Jan-Feb CPI prints on temporary electricity tariff discount … We expect a payback in headline CPI prints, from 0.3%oya in Jan-Feb to 2.8%oya for the rest of 2025, with a full-year average of 2.3%, close to the mid-point of the 1.5-3.5% inflation target. In addition, core inflation momentum is on the rise, quelling concerns of weak demand-pull inflation for now.”