Macro Strategy: The Resistance Test

Macro Strategy

The Resistance Test

Domestic buffers could help defend 7.5% resistance, although external pressures and IDR weakness increase breach risks.
An October Fed pause offers temporary relief, but persistent inflation risks and further tightening limit its benefits.
BI's targeted measures support IDR stability and liquidity, but persistent currency pressures favour another 25bps hike.

10Y INDOGB: Will 7.5% Resistance Hold? Elevated oil prices continue to put bond yields in focus. Brent’s recent return to USD117/barrel adds upside risks to inflation and could keep yields elevated. Potential food price pressures from El Niño add another concern. In our report “The Curve Sets the Tone”, published on 28 September, we raised our 2026 10Y INDOGB yield range to 6.90–7.68%, from 6.78–7.46%, with a year-end baseline of 7.34%. Yields are now hovering above 7.4%, exceeding our baseline and bringing the 7.5% resistance back into focus. Our pessimistic scenario places yields at 7.68%. In this week’s report, we assess the risk of 10Y INDOGB yields rising above 7.5%. Our main observation is that today’s market differs from previous episodes, particularly given stronger domestic investors base.

The 7.5% level remains an important historical resistance for 10Y INDOGB, although the sources of support have changed. Since S&P upgraded Indonesia to investment grade in May 2017, yields have exceeded this level in only three periods: May 2018–June 2019, March–May 2020 and October 2022. The resistance has held since 31 October 2022, despite yields reaching 7.445% in June 2026 and 7.447% this October. In our view, lower foreign exposure, liquidity from SRBI maturities and stronger domestic demand could help sustain this resistance. These buffers, however, do not rule out a breach if market pressures intensify. We highlight three considerations:

2018–19: External pressures prompted monetary tightening. Rising US rates, capital outflows and IDR depreciation drove yields higher. The 10Y UST yield exceeded 3%, the IDR weakened towards 15,200, and Indonesia’s current account deficit widened to 2.98% of GDP from around 1.7% in 2017. BI responded by raising rates by 175bps.

March 2020: A global liquidity shock triggered widespread selling. Foreign outflows pushed INDOGB yields above 8% despite UST yields falling below 1%. BI responded with liquidity injections and bond purchases. The fiscal deficit eventually widened to 6.1% of GDP as pandemic spending increased.

October 2022: Inflation and aggressive Fed tightening drove repricing. UST yields reached 4.2%, and domestic inflation approached 6%, prompting further BI rate hikes.

What now? Higher external yields meet stronger domestic buffers. UST yields remain near 5%, above previous episodes, but domestic inflation is lower at 3.28%, and the budget deficit stands at 2.68% of GDP. Foreign SBN ownership has fallen from around 40% before 2020 to 13% in 2026, reducing exposure to foreign selling. Yield pressures should remain contained as long as these buffers hold. Equity outflows following MSCI’s standalone announcement are the main near-term downside catalyst through potential IDR weakness. INDOGB has attracted net foreign inflows since June, but our yield-based calculation places the implied USD/IDR breakeven at around 19,200. Depreciation towards this level could increase the risk of those inflows reversing.

The External Factor: A Fed Pause, Not a Policy Shift. Following September’s rate hike, the Fed enters its October meeting weighing how soon to tighten again. Recent official comments and market pricing increasingly favour a pause, although the case for further hikes remains intact. We highlight 4 key factors ahead of the October FOMC:

Fed officials favour further tightening, with flexibility on timing. September’s FOMC minutes showed that most participants expected another increase by year-end, subject to incoming data. Recent comments support this view (Exh. 5), despite differences over the number and timing of hikes. Most officials prefer to assess economic conditions and past hikes’ effects before raising rates again.
Inflation risks are rising despite broadly stable economic activity. October’s Beige Book reported little overall change in activity and slight employment growth, but faster price increases driven by energy, tariffs and other input costs. September CPI accelerated to 3.7% YoY from 3.4%, exceeding consensus, as gasoline prices jumped 9.1% MoM. Inflation expectations also remain a concern. The 5Y5Y forward measure is near 2.3%, above its June level, and the New York Fed’s September survey showed one-year inflation expectations rising to 3.9% and three-year expectations to 3.3%. Geopolitical tensions add further energy risks. Brent exceeded USD110/bbl once again following escalating Houthi–Saudi tension, despite Persian Gulf crude exports recovering towards prewar levels. Renewed Russian strikes on Ukraine’s energy infrastructure add to the uncertainty further.
Markets expect an October pause, offering temporary relief for Indonesian assets. Market pricing assigns around a 90% probability to an October hold, followed by a December hike and roughly one additional increase in 2027. The 10Y UST yield has also retreated below 5% after briefly reaching around 5.3%, of which, in our view, appears to reflect rising safe-haven demand more than easing inflation risks.
US midterms may affect sentiment, but macro conditions remain decisive. Historical patterns suggest Democrats are more likely to win the House than both chambers, potentially stalling legislation without significantly changing the administration’s policies. Our analysis finds no consistent directional impact on USD/IDR around midterm elections, despite average IDR appreciation of 0.41% in the four weeks after Election Day (details on Exh. 9).

In our view, a Fed pause and lower UST yields could temporarily support IDR and domestic assets, but further US tightening remains a risk and US real yields remain the key transmission channel.

BI Rate: Growth vs Stability Policy Trade Off. Bank Indonesia’s policy stance is increasingly shaped by the trade-off between safeguarding IDR stability and preserving domestic liquidity, with the latest policy mix suggesting a preference for targeted measures over broad-based monetary tightening. Against this backdrop, we revisit the historical drivers of BI rate decisions and the signals from the government bond yield curve and SRBI auctions to assess the likelihood of further tightening into early 2027.

At its last RDG meeting, BI held its policy rate at 5.75% for the fourth consecutive month and raised the Deposit Facility rate by 25bps to 5.00% to strengthen monetary transmission and support the IDR. In September–October, BI also increased DNDF premium reductions to 40% for six-month and 45% for twelve-month tenors, maintaining buy-swap incentives at 15% for three months, 20% for six months and 25% for twelve months. To support liquidity and credit growth, BI announced a phased 200bps reduction in conventional banks’ reserve requirements, from 9% to 7%, effective November–December.

In our view, these measures seek to strengthen currency stability and preserve domestic liquidity and do not, however, signal a definitive end to the hiking cycle. Global monetary tightening and domestic equity outflows following MSCI’s announcement continue to pressure the IDR. The key question is whether targeted measures can contain that pressure sufficiently to avoid another hike by year-end or early 2027.

Historical episodes point to currency stability and external financial conditions as the main triggers for tightening. BI has often raised rates when IDR pressure intensifies and interest rate differentials narrow, even with manageable domestic inflation. Three factors shape our assessment:

Currency risks remain the clearest trigger for another hike. The 2018 and 2022–23 tightening cycles delivered cumulative hikes of 175bps and 250bps, respectively, alongside IDR depreciation of 7.5% and 8.2% and elevated currency volatility. The 2023–24 episodes also demonstrated BI’s willingness to raise rates pre-emptively as currency pressures intensified. A similar pattern emerged in May–June 2026, when BI raised rates by 100bps as IDR weakness deepened. Annualised IDR volatility has increased but remains below levels seen during the 2018 and 2022 tightening episodes. Nevertheless, with USD/IDR reaching 18,062 following foreign outflows, persistent depreciation remains the main risk prompting further tightening.
Narrow rate differentials leave the IDR sensitive to Fed expectations and global yields. The BI–Fed policy rate differential narrowed to 50bps in September 2025 before widening to 175bps following BI’s subsequent hikes. This remains below the 250–350bps range observed in 2018–19. DXY has also recovered to around 101.8. The 10Y INDOGB spread over UST has widened to 246bps from its September low of 185bps, providing some support for relative bond attractiveness. However, renewed expectations of Fed tightening or higher UST yields could intensify IDR pressure and strengthen the case for another BI hike.
Inflation limits room for easing but remains a secondary trigger for tightening. September headline inflation reached 3.28% YoY, near the upper end of BI’s 1.5–3.5% target range. Core inflation stood at 2.84%, and volatile food inflation reached 5.03%. Elevated food prices and higher import costs from IDR depreciation could add pressure. Unless headline inflation accelerates materially or second-round effects emerge, however, currency stability and external financial conditions are likely to remain the main drivers of BI’s next decision.

Our view: One further 25bps hike to 6.00%. SRBI yields have eased to 6.59%, and foreign positioning has improved from early 2026, providing some support for the IDR. The wider sovereign yield spread also offers a buffer. Nevertheless, persistent currency pressure and a relatively narrow BI–Fed rate differential suggest that targeted measures may need additional rate support. We therefore expect one further 25bps hike, taking BI’s policy rate to 6.00%, with the timing dependent primarily on the IDR’s response to ongoing stabilisation measures.

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