Data out this week saw May inflation ease to 2.8% yoy vs 3% month before, with core at 1.9% yoy. The headline registered its first month-on-month deflation print (-0.03%) since Aug23, driven by lower food led by rice, and perishables, alongside transportation at -0.36%. With festive related demand behind us, capped food prices on administrative efforts and rupiah stabilisation helping to limit imported price pressures, the headline inflation eased in May towards the middle of the BI target. Policymakers will draw comfort from the moderation in inflation, which opens the space to be focused on global developments and its impact on the domestic financial markets. A pullback in the dollar and UST yields allowed the IDR 10Y yield to ease below 7% this month, while USDIDR stayed bid above 16200 (rupiah is down ~5% on YTD basis). The need to maintain rates at attractive levels and support the currency through favourable differentials is likely to see the central bank on hold this month.
Separately, Finance Minister Mulyani signaled that the 2025 Budget deficit will stay within 2.45-2.82% of GDP, factoring in new social sector spending of the incoming government. State revenues are projected at 12.1-12.4% of GDP and expenditure at 14.6-15.2%, besides keeping the public debt ratio capped at 38.7% of GDP. Debt markets have been concerned over incremental increase in borrowings on the back of a potentially wider fiscal deficit, with bond purchases by banks (+IDR 32.8trn) and the central bank (+IDR 39.9trn) making up for foreign outflows (-IDR 35.5trn). We expect 10Y yields and USDIDR to stay bid at pullbacks on domestic and global cues.
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