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IDR markets have relatively steady in October despite higher oil prices and a bid dollar, though sentiment remains sensitive to external developments and swings in global risk appetite. USDIDR traded a shade below 18000 this week, but ran into buyers at pullbacks, while 10Y yield hovered around 7.15-7.25%. A jump in the Aug goods trade surplus aided this respite, alongside foreign purchases of domestic debt, which have remained positive this month and YTD basis. Insurers, the central bank, and retail investors have remained key anchors for the bond market. SRBI rates are off highs to sub-7% levels, but attracting steady demand, also likely encouraged by the hedging discounts. An improved flows outlook has helped contain spillovers from a wider current account deficit.
We expect BI to extend its pause this month, as they lean on non-rate measures, including intervention and hedging facilities to help the currency. Our base case for the benchmark rate to be held unchanged this quarter rests on a lower conviction around back-to-back US rate hikes in Oct and relative rupiah stability. Separately, the government announced additional support for low-income households in 4Q by way of in-kind assistance and wage subsidies. This year’s fiscal deficit is likely to close in at -2.85% of GDP, close to our forecast at -2.9%, with few uncertainties facing the 2027 math.
By contrast, the market backdrop remains challenging for PHP assets, with a weak peso and sticky yields underscoring investor concerns over inflation and macro balances. The peso has depreciated ~6% this year, alongside under-pressure bonds as the 10Y yield neared 8% tracking higher US yields. Philippines inflation surged to 7.2% y/y in September from 6.1% in August, matching this year's peak and approaching a three-year high. Food inflation reaccelerated on weather-related supply shocks, particularly in rice, meat and vegetables, compounded by higher energy and transport costs. Core inflation (ex-volatile food and energy items) rose to 4.7% in Sep from 4.1% in Aug, signaling a broadening out of price pressures. Looking ahead, inflation risks remain tilted to the upside, driven by further public transport fare adjustments, elevated oil prices, recent wage hikes and peso depreciation.
With inflationary pressures likely to be persistent, the likelihood of further hikes in 4Q26 rises. We maintain our call for a 25bp hike in October and include another measured hike to our baseline for Dec26. The Monetary Board has already raised rates three times this year to anchor inflation expectations and support the currency as price pressures intensify. While inflation warrants a hawkish bias, deteriorating growth conditions argue for caution. Reflecting the weak 1H26 outturn of 2.6% y/y, we temper our 2026 growth forecast to 3.0% from 4.0%.
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