Regional economic growth is projected to remain solid in the second quarter of 2026 despite heightened global uncertainty stemming from the conflict in the Middle East. Stronger investment remained a key driver of economic growth in most regions in the second quarter of 2026, boosted by the accelerated implementation of National Strategic Projects (PSN), government priority programs and private projects, particularly in industrial estates and special economic zones in several regions. Continued positive export performance also supported economic growth in Sumatra and Kalimantan, consistent with strong demand from major trading partners for coal and crude palm oil (CPO). By sector, regional economic growth was supported by strong construction activity across all regions. Positive sectoral performance was also supported by the manufacturing industry in Sumatra in line with continued growth in CPO processing. Manufacturing performance in Java also remained solid despite pressure from higher imported input costs. Meanwhile, improving mining sector performance in Sumatra and Kalimantan supported economic growth in both regions during the second quarter of 2026.
Regional economies are projected to record stronger growth in 2026 than in the previous year. Stronger economic growth across all regions will primarily be supported by resilient domestic demand, including household consumption and investment. Meanwhile, exports of key commodities in several regions need to be continuously strengthened amid slowing global demand due to the ongoing war in the Middle East. By sector, stronger regional growth in 2026 will be supported by construction activity related to the development of PSN projects, government priority programs and private projects in industrial estates and special economic zones in several regions. In terms of the mining sector, stronger performance in Balinusra and Sulampua will be supported by higher copper ore grades and the resumption of smelter operations following post-disaster recovery. Meanwhile, manufacturing industry performance in Java is projected to maintain solid growth, primarily supported by domestic demand amid weaker external demand.
Composite Consumer Price Index (CPI) inflation in the second quarter of 2026 remained within the target range. Nationally, CPI inflation was recorded at 3.34% (yoy), thus remaining within the 2.5±1% inflation target range. Core inflation increased moderately, driven by persistent pressures from international commodity prices amid solid domestic demand. Meanwhile, volatile food (VF) inflation remained below 5% in Java, Balinusra and Kalimantan, despite increasing from the previous period. This was influenced by lower supply following the end of the peak harvesting season and extreme weather in several major production hubs. VF inflation in Sumatra and Sulampua, however, continued to warrant attention, as it remained above 5% (yoy). In terms of administered prices (AP), inflation moderated as the low-base effect associated with electricity tariff discounts in the corresponding period of the previous year dissipated.
CPI inflation in 2026 is projected to remain within the 2.5±1% target range. The CPI outlook is underpinned by core inflation, which is projected to remain under control in line with inflation expectations remaining anchored within the target range and contained imported inflation. Meanwhile, VF inflation is projected to remain under control, supported by strengthened inflation control synergy between Bank Indonesia and the Central and Regional Governments through the National/Regional Inflation Control Teams (TPIP and TPID), coupled with stronger implementation of the Inflation Control and Food Prosperity Movement (GPIPS), including measures to anticipate the impact of weather disruptions (El Nino) on food prices. AP inflation is also projected to remain under control, supported by the Government's policy of maintaining energy prices.
Moving forward, persistently high global uncertainty triggered by the ongoing geopolitical conflict in the Middle East demands continued vigilance. The impact of the conflict warrants continued monitoring given its potential implications for the domestic economy. Negotiations between the United States and Iran concerning an agreement to resolve the conflict in the Middle East are expected to remain dynamic, requiring continued vigilance as well as stronger fiscal and monetary policy coordination and synergy to reinforce external resilience, maintain stability and bolster domestic economic growth. Bank Indonesia will therefore continue to strengthen its policy mix through monetary, macroprudential and payment system policies in close synergy with government policies to maintain stability, while supporting economic growth.
