Highlights

• The Federal Reserve’s Hawkish Hold Increased External Pressure on Indonesia: The Fed kept the federal funds rate at 3.50%–3.75% in a split 9–3 decision, with three policymakers favoring an immediate 25-bps hike. The hawkish stance reinforced higher-for-longer US rate expectations, while the US 30-year Treasury yield surged to 5.27%, its highest level since June 2007 and around 450 bps above its 2020 low. Persistently elevated US yields and a stronger USD could intensify pressure on the IDR, increase capital outflow risks, and keep Indonesia’s domestic financing costs high.

 

• Indonesia's Economic Slowdown Intensified as Domestic Demand Weakened: Manufacturing PMI fell further into contraction at 46.9 in June, with broad-based weakness across production, new orders, exports, employment, purchasing activity, and inventories, while consumer confidence declined for a third consecutive month to 117.8, signaling weaker domestic demand. Although FDI rose 27.4% YoY to a record IDR257.7tn in 2Q26, stronger investment has yet to offset deteriorating business activity and slowing domestic demand, suggesting that economic growth is likely to remain under pressure in the near term.

 

• Inflation remained within Bank Indonesia's target range, but upside risks became increasingly pronounced: June headline inflation accelerated to 3.34% YoY from 3.08%, supported by persistent price pressures beyond food. While food inflation moderated, transportation costs, imported goods, services, IDR depreciation, and higher global energy prices are likely to keep inflation elevated, limiting the prospect of meaningful easing in price pressures during 2H26.

• Bank Indonesia maintained policy rate at 5.75%, reflecting constrained policy flexibility amid rising external and domestic risks: Following cumulative tightening of 100 bps since May, BI kept rates unchanged to assess the impact of previous hikes on the economy. However, tighter financial conditions are expected to weigh further on credit growth, investment, and household spending, while IDR weakness, imported inflation, and elevated global yields on potential further Fed rate hike leave little room for policy easing.

 

• Indonesia's medium-term fundamentals are mixed with near-term macroeconomic risks having increased materially: A low fiscal deficit of 0.76% of GDP and continued progress on infrastructure investment provide some structural support. However, hiccups on downstream industrialization and the combination of Brent crude above USD90/bbl, the first monthly trade deficit since April 2020, persistent rupiah depreciation, higher global interest rates, and uncertainty surrounding US trade policy suggests that growth is likely to face stronger headwinds, while external vulnerabilities remain elevated in the coming quarters.