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US President Trump announced that a trade deal had been reached with Indonesia, which will lower the tariff rate to 19% from 32% levied earlier. More than 20 countries have received tariff notification letters from the US president, but according to the White House, Indonesia is the fourth country to conclude a “deal.” Indonesia has reportedly committed to purchase $15bn worth energy imports and $4.5bn worth agricultural goods from the US, besides stepping up orders for aviation jets. US might tap into the country’s natural resource supplies, including copper, with the government seeking better access to the onshore industries/ markets. Further details were scant at the time of writing, and there was lack of clarity on whether the terms had been agreed on bilateral basis. Coordinating Minister Moegiaro was cited saying that the government plans to issue a joint statement with more information. US had flagged Indonesia’s non-trade barriers, amongst others, as key sticking points during negotiations. Textiles, footwear, electrical equipment, and commodities are amongst key exports to the US, with the nominal export value in 2024 amounting to ~2% of Indonesia’s GDP. Indonesia is amongst the US’ top 25 trading partners, with the trade surplus (with the US) recorded at $18bn last year.
Bank Indonesia meets today for its monthly rate review and is likely to weigh available policy options. Domestic price developments have been conducive, with June inflation at 1.9% yoy, well within the central bank’s target range. Selected food categories like chillies and rice added to the headline, besides airfares and precious metals, while sea/ rail transport tariffs receded on fare discounts announced for June-July. Core inflation flatlined at 2.4% yoy. While the price outlook is conducive, policymakers are likely to draw direction from their reading of financial market action, with US Fed rate cut expectations fading after a firm inflation print. External caution is being counterbalanced by the fresh news over the trade deal. Our baseline expectation is for a rate pause today, though the overnight conclusion of the trade deal will be positive for IDR-denominated assets, increasing the possibility that the BI might bank on improved sentiments to assert its dovish bias today. It is a close call. High frequency activity indicators have been soft, including auto sales, consumer confidence indices and manufacturing PMI readings, requiring policy to maintain a dovish bent. We continue to expect at least 50bp cuts in 2H25. Concurrently, the use of short-term securities i.e., SRBIs is being scaled back to redirect demand towards short-end bonds, effectively steepening the yield curve. Return on SRBI securities have eased to all-time lows, since the instrument was introduced back in September 2023. Expectation of further rate cuts is likely to act as an additional tailwind for short-term papers.
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