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Bank Indonesia kept the benchmark rate unchanged at 5.75% on Wednesday, along our expectation. An extended pause on rates was a vote to defend rupiah stability in midst of tough global conditions. Despite domestic macro indicators pointing to a need for rate cuts, markets are likely to price out easing this quarter as the rupiah continues to underperform, unable to bank on a sharp US dollar correction this month. On the domestic end, March inflation rose to 1.0% in March (but stayed below the BI target) vs average 0.3% rise in January-February as the impact of one-off support measures faded. Domestic growth impulse has been subdued, in addition to a sub-par fiscal run-rate at the start of the year (Indonesia’s macro and tariff overhang). March credit growth slowed to 9.2% yoy, running below the projected 11-13% pace for the year. In this midst, USDIDR hovered above 16800 this week, retaining its position as one of the regional underperformers on YTD basis, despite strong intervention presence. Macroprudential easing and liquidity support are likely to be tapped to ease financial conditions and underpin credit growth. BI signaled that the foreign funding ratio for banks might be adjusted, while also continuing to purchase bonds in the secondary market as well as lowering banks reserve requirement ratios for priority sectors. We expect policymakers to remain opportunistic to lower rates by at least 50bp this year, when the tariff dust settles and currency stabilises, as real rates signal a significant buffer.
On the tariff front, Indonesian officials are in the US for negotiations, seeking to gain relief from the high reciprocal tariff rate. Negotiations might include an offer to step up purchases from the US to improve the bilateral trade balance. Notably, Indonesia’s exports to the US amount to ~2% of GDP, amongst the lowest exposures in the region, besides Philippines and India. However, labour-intensive sectors have an outsized exposure to the threat of tariffs, especially as more than half of Indonesia’s textiles and furniture exports heads to the US, besides more than a third of footwear. While the 90-day pause provides near-term relief, investors are likely to seek conciliatory guidance from the government to provide clarity on domestic developments and signal better defences against a tougher global environment. 
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