Indonesia’s core inflation rose to 2.76% year on year in June, coming in above the 2.6% forecast. The outturn points to firmer underlying price pressures than markets had pencilled in for the month.
The June reading places core inflation 0.16 percentage points above expectations. The data add to the near-term focus on domestic demand conditions and the policy calibration of Bank Indonesia, as price dynamics remain under close watch.
Implications For Bank Indonesia Policy And The Rupiah
The higher-than-expected core inflation print for June at 2.76% is a significant development. This data strongly suggests that Bank Indonesia will maintain a hawkish stance in its upcoming meetings. We believe this puts any near-term interest rate cuts firmly off the table.
In response, we are looking at positions that favor a stronger Indonesian Rupiah. The currency has already reacted to the news, and we see further strength as rate cut expectations diminish. We are considering buying IDR call options or shorting USD/IDR futures contracts maturing in the next quarter.
Impact On Bond Markets And Historical Context
This inflation surprise is also impacting the bond market, with the 10-year government bond yield already popping above 7.2% in early trading. We view this as an opportunity to initiate positions that benefit from rising rates, such as using interest rate swaps to pay fixed rates. This trend will likely continue as the market prices in a more aggressive central bank policy.
Historically, Bank Indonesia has not hesitated to act, as seen in the aggressive 2022-2023 hiking cycle to combat similar pressures. While our domestic view is hawkish, we must also monitor global factors. A surprisingly dovish turn from the U.S. Federal Reserve is the main risk that could temper BI’s resolve.
