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Jakarta, August 4, 2026 – Indonesia’s inflation cooled sharply in July, offering the central bank room to pause further tightening as it weighs domestic demand against external risks.
Analysts at Kenanga Research expect Bank Indonesia (BI) to keep its benchmark rate unchanged at 5.75 percent, citing resilient core inflation and the need to safeguard currency stability.
Headline inflation fell to 2.88 percent year-on-year in July, down from 3.34 percent in June and below market expectations of 3.20 percent.
On a monthly basis, consumer prices slipped 0.14 percent, marking the first deflation since January.
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The decline was largely driven by easing food prices, with staples such as shallots, tomatoes, and eggs registering notable drops.
Core inflation, however, remained firm at 2.76 percent, the highest in more than three years.
This persistence underscores robust domestic demand, even as headline pressures ease.
Transport costs surged 5.12 percent, the fastest pace in nearly three years, fueled by higher gasoline prices, airfares, and vehicle costs.
Kenanga Research noted that while food-driven disinflation provides short-term relief, underlying demand and external uncertainties argue against premature easing.
“Bank Indonesia should hold rates steady, prioritizing exchange rate stability and ensuring inflation remains anchored within the 1.5 to 3.5 percent target range,” the firm said.
The rupiah has stabilized around 18,000 per US dollar, reducing immediate pressure for further hikes. Yet risks remain.
Global fuel prices, currency volatility, and resilient domestic consumption could reignite inflationary pressures later in the year.
Kenanga maintains its 2026 inflation forecast at 3.1 percent, warning that fuel adjustments and rupiah weakness may lift costs in the months ahead.
Regionally, Indonesia’s trajectory mirrors broader moderation across Southeast Asia.
Thailand’s inflation eased to 2.4 percent, comfortably within its central bank’s target, while Singapore’s inflation edged up to 1.9 percent, a 22 month high, driven by accommodation costs and stronger core inflation.
For Indonesia, the policy challenge lies in balancing easing headline inflation with persistent core strength.
BI’s recent tightening has anchored expectations, but policymakers must remain vigilant against external shocks.
Holding rates steady allows the central bank to consolidate gains while monitoring risks from fuel prices and global volatility.
The July data highlight a nuanced picture food prices are cooling, but transport costs and core inflation remain elevated.
This divergence underscores the complexity of BI’s task.
A premature pivot could undermine currency stability, while excessive tightening risks dampening domestic demand.
As Southeast Asia navigates shifting global conditions, Indonesia’s cautious stance reflects a broader regional trend of central banks prioritizing stability over aggressive moves.
For now, the sharp drop in headline inflation gives BI breathing room, but resilient demand and external uncertainties ensure the policy path ahead remains delicate.
