Higher-for-longer as stability and inflation risks build

Despite tighter financial conditions, U.S. economic activity remained resilient, with personal consumption and personal income both rising by 0.7% MoM and 1Q26 GDP growth revised upward to 2.1% annualized, suggesting domestic demand continues to support economic momentum. The combination of persistent inflation and resilient growth reinforces the higher-for-longer interest rate narrative and increases the likelihood of another Fed rate hike as early as Sep-26. The stronger macro backdrop is likely to keep the DXY well supported and UST yields elevated, maintaining pressure on emerging market assets and reinforcing the need for BI to preserve competitive domestic yields to sustain portfolio inflows and Rupiah stability.

The government confirmed that Indonesia will stop importing diesel fuel starting this year alongside the nationwide implementation of the B50 biodiesel mandate on 1-Jul- 26, marking another milestone in strengthening energy security and reducing reliance on imported fuel. The policy is expected to substitute around 300,000 barrels per day of diesel consumption through domestically produced FAME, reducing crude oil import requirements from around 1.0 million bpd to 700,000 bpd while simultaneously supporting downstream palm oil development and improving domestic demand for CPO. In our view, the B50 mandate should help narrow Indonesia’s oil trade deficit, strengthen the current account, and reduce Rupiah vulnerability to external energy price shocks, although its long-term sustainability will depend on sufficient CPO supply, land availability, and balancing food, export, and energy security objectives.