Indonesian Central Bank faces a dilemma: Ramadan demand and low base effects will continue to push inflation higher

Kenanga Investment Bank economists recently released a report analyzing that multiple factors will keep Indonesia’s short-term inflationary pressures high. Among them, last year’s low base effect and increased consumption demand during Ramadan are the main drivers. These two factors are intertwined, testing the Bank of Indonesia’s policy adjustment capabilities.

Ramadan Stimulates Demand, Low Base Effect Fuels Inflation

Ramadan is an important festival in the Islamic world, annually driving a consumption peak in Muslim-majority areas. In countries like Indonesia, where Muslims make up the majority, household purchasing power clearly rises during Ramadan, with demand for basic goods such as food and daily necessities surging. Coupled with the relatively low base last year, this year’s price increases appear particularly significant.

Economists say this high inflation trend is expected to continue until around April. Kenanga maintains its forecast for the Consumer Price Index (CPI) at 1.9% for 2025 and 2.5% for 2026. Although inflation remains moderate in the medium term, short-term pressures are indeed significant.

Pressure Eases After April, but Risks Remain

As Ramadan ends and the low base effect gradually diminishes, economists expect price pressures to ease starting in April. However, new risk factors are brewing. Global geopolitical tensions are rising, increasing uncertainty, which has already begun to pressure the Indonesian rupiah. A weakening exchange rate raises import costs, further pushing up domestic prices.

Deeper concerns lie in the fact that the central bank’s policy space for further easing has significantly narrowed. On one hand, inflation risks have not been fully resolved; on the other, market worries about the independence of the central bank and the credibility of fiscal policy may be challenged. Morgan Stanley Capital International has also issued warnings regarding Indonesia’s data transparency and trading standards.

Multiple Pressures Combine, Central Bank Faces Dilemma

Escalating geopolitical tensions and increasing global economic uncertainty create a “double pressure” with domestic policy doubts. The Bank of Indonesia must address potential inflation rebound after Ramadan, face exchange rate depreciation challenges, and respond to market concerns over policy independence.

This situation directly limits the central bank’s room to further cut interest rates. Under the constraints of inflation risks, exchange rate pressures, and policy credibility, the options for monetary policy tools become extremely limited. For investors focused on Indonesia’s financial markets, inflation trends during Ramadan and the central bank’s policy stance will remain key market focuses.