Macro Strategy

Policy Transition in Focus

 

  • We see fading upside risk to inflation as LT expectations anchored and the US–China trade truce adding a disinflationary impulse.
  • Fed pivot risk: a less dovish stance could widen expectation gaps, reigniting volatility across yields, currencies, and equities again.
  • While lending standards remained tight in 3Q25, the latest survey shows banks expect a notable easing in 4Q25, lowest level since 2018.

 

Will the Fed Hold? In line with expectations, the Federal Reserve cut its benchmark rate by 25 bps at the October FOMC meeting to 3.75–4.00%, marking a mid-cycle adjustment aimed at sustaining growth amid cooling labor conditions. Job gains have slowed, but unemployment remains low, highlighting the Fed’s ongoing challenge of balancing employment support with price stability. Despite dissent from two members, the majority placed greater weight on risks to employment and growth over still-elevated, though moderating, inflation. Chair Powell emphasized that another rate cut in December is “not guaranteed,” signaling a more neutral and data-dependent policy stance. Meanwhile, with the reverse repo balance near zero, the Fed announced plans to end quantitative tightening by halting Treasury runoff starting December 1, in a move intended to ease funding pressures and improve liquidity conditions.

 

Market attention now shifts to the Dec-25 FOMC meeting, where market movement will hinge on how the outcome aligns with expectations. Following Powell’s cautious tone, the consensus for another cut has weakened. We continue to see a balance of two key risks, though the upside risk to inflation is gradually fading: 1. The Fed’s preferred 5-year, 5-year forward (T5YIFR) inflation gauge remains stable around the 2% target, suggesting anchored long-term expectations; and 2. The newly announced US–China trade truce, including a 10% tariff reduction, introduces a disinflationary impulse by lowering import costs, reducing one of the main constraints to further easing. Should labor market weakness persist and inflation continue trending toward target, the Fed could resume a gradual easing path to extend support for growth. In such a scenario, we expect a measured market response, as a December cut would largely align with current expectations. Markets are currently pricing in a 67% probability of a December rate cut, while the 2-year UST yield, hovering around 3.58%, similarly signals expectations of further easing ahead.

 

What’s The Risk if Fed’s Pivot. The Federal Reserve’s policy decisions often serve as a key catalyst for market volatility, particularly when outcomes deviate from investor expectations. Historically, periods of divergence between market pricing and the Fed’s projections have amplified uncertainty and swings across asset classes. In 2023 and early 2024, markets anticipated earlier rate cuts while the Fed maintained its “higher for longer” stance, creating a wide expectation gap that fueled volatility. As communication improved in late 2024, expectations gradually converged, restoring confidence and easing market fluctuations. As such, if upcoming data or policy guidance signals a less dovish stance than markets currently anticipate, the expectation gap could widen again. A firmer policy tone on slower pace of rate cuts could quickly reignite volatility across bonds, currencies, and equities. While the present environment supports relative stability, investors should remain alert to the risk of renewed policy divergence that could unsettle market sentiment in the coming months.

 

Historically we see a clear asymmetry in potential reactions: if the Fed holds rates steady when markets expect a cut, the hawkish interpretation could lead to major market volatility. A similar pattern occurred in Oct-Nov 2024, when the Fed reiterated its “higher for longer” message, following 50 bps cuts in Sep 24, sparking a surge in Treasury yields, a stronger dollar, and broad equity weakness as markets adjusted to a sustained restrictive policy path. During those months, the 2Y Treasury yields up 82bps, 10Y yields by 66bps, as easing expectations are priced out while the DXY also strengthened 7%. The 2-year yield and DXY are now hovering near their end of Sep-24 levels, at 3.58% and 99.7, respectively.

 

Cautiously Optimistic Banking Sentiment. The latest Banking Survey from Bank Indonesia indicates that the Loan Net-Weighted Balance (SBT), a key gauge of new loan disbursement, stood at 82.3% in 3Q25, up 1.68 p.p. y-y but down 2.89 p.p. q-q. The weakest performance was seen in consumption loans, which have remained below 60% absorption since early 2025. While loan growth reached 7.7% as of Sep-25, showing improvement since August, a return to double-digit growth still appears challenging due to several factors:

 

  1. Despite fiscal and monetary support, including SAL placements and a lower BI rate, respondents remain only modestly optimistic, projecting end-2025 loan absorption at 94.4%, similar to 3Q expectations.
  2. Third-party fund (TPF) growth expectations have softened, with SBT revised down to 94.3%, reflecting more cautious funding sentiment.
  3. Historical trends show a strong correlation between loan disbursement SBT and overall loan growth; with 4Q25 SBT at 94.4%, nearly matching 3Q24’s 95.7%, a sharp rebound appears unlikely.
  4. Bank Indonesia shares this view, projecting loan growth near the lower bound of 8–11% by year-end.

 

Meanwhile, lending standards tightened in 3Q25, as reflected by a positive Lending Standard Index (ILS) of 5.78, reversing the neutral trend seen in 2024–2025. The sharpest tightening occurred in working capital, investment, and MSME loans, mainly through stricter credit ceilings, shorter tenures, and higher approval fees, though collateral requirements eased.

 

Going forward, banks anticipate a loosening in 4Q25 (ILS: -5.95), the lowest since 2018. Nonetheless, with liquidity already ample, policymakers must remain cautious to prevent potential default risks from excessive risk-taking.

 

Yield volatility is on the rise. The 10-year US Treasury yield traded with elevated volatility, falling 12 bps to 3.99% on 28th Oct before rebounding to 4.11% by end of Oct, while the 2-year yield rose 13 bps to 3.6%, reflecting shifting expectations over the Fed’s policy path following more hawkish statement. Domestically, the 10-year INDOGB yield edged up 8 bps to 6.06%. The US Dollar Index strengthened 0.57% w-w to 99.53, while the IDR weakened slightly by 0.21%, closing at IDR16,630. Meanwhile, Indonesia’s 5-year CDS spread narrowed by 6 bps w-w to 74 bps, signaling a modest improvement in sovereign risk perception.

 

  • Fixed Income Flows - Foreign investors booked a net outflow of IDR4.69tn w-w in the government bond (SBN) market as of October 30, reducing total foreign holdings to IDR881 tn. On MTD basis, cumulative outflows reached IDR27.56tn. From the domestic side, banks remained the primary buyers, recording net inflows of IDR14.32tn w-w (MTD IDR26.37tn). Bank Indonesia (excluding repo) posted outflow of IDR7.61tn, extending its MTD outflow to IDR10.15tn. Mutual funds added IDR2.70tn w-w, while insurance and pension funds collectively registered IDR3.08tn of inflows.
  • SRBI Flows - As of October 31, 2025, the outstanding balance of Bank Indonesia Rupiah Securities (SRBI) eased slightly by IDR0.33tn w-w to IDR706 tn. Foreign investors recorded a net inflow of IDR0.9tn for the week, helping offset recent selling pressure. However, YTD cumulative foreign outflows reached IDR135.86 tn, with foreign holdings now at IDR79tn, equivalent to roughly 11% of total SRBI outstanding.
  • Equity Flows - The JCI fell 1.3% w-w, marking the worst performance in the region, as speculation over potential MSCI index changes triggered heavy domestic selling in several major conglomerate stocks. Meanwhile, foreign inflows of IDR2.3 tn in the fifth week of October partially offset earlier losses, bringing month-to-date outflows to IDR678 bn and year-to-date outflows to IDR45.3tn.

 

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