The rise in oil prices has a dual impact on Indonesia—limited inflation, increased deficit pressure

(1) Bank of America economists Kai Wei Ang and Rahul Bajoria pointed out in an analysis report that Indonesia's energy subsidy policy is acting as a "buffer," effectively curbing domestic inflation pressure by limiting the transmission of global oil price increases to consumers. (2) Inflation outlook: Based on this, they made specific predictions about Indonesia's inflation trend. The inflation rate may slow from 4.76% in February to 3.4% in March, then drop below 3%, and remain at this level for the rest of 2026. (3) Fiscal risk: However, while the subsidy mechanism suppresses inflation, it also puts pressure on fiscal finances. The report warns that if Brent crude oil prices remain above $70 per barrel, it may challenge Indonesia's fiscal deficit target of 2.68% of GDP. The economists estimate that for every $10 increase in oil prices, the fiscal deficit will expand by 68 trillion Indonesian rupiah. They specifically pointed out that if Brent crude oil prices average $85 per barrel from March to December, Indonesia's government-set 3% deficit cap may be breached. (4) Policy choices and central bank actions: Facing this situation, Bank of America analysts believe that removing the price cap on subsidized gasoline will be the last resort for the Indonesian government. Against the backdrop of increasing global uncertainty, Indonesia's central bank may prioritize the stability of the rupiah. The report predicts that, assuming the Federal Reserve cuts rates twice this year, Indonesia's central bank may follow with one rate cut in the second half of the year, lowering the rate to 4.50%.