Internal move -> Talk between managers (Pre/ post interview)

This kind of policy isn't uncommon, particularly in larger organisations.

I agree that it's unfriendly to workers, and it's a large part of why I didn't make an internal move at a previous employer.

Ultimately there isn't much you can do besides being upfront with your manager ahead of time so they hear it from you and not the hiring manager, and frame things less as against your current team and more how excited you are for the potential new role.

If you're seriously concerned that your manager may attempt to tank the interview or otherwise take action against you, it might be best to consider an external move instead of internally.

How can I strategize given this company policy?

1. Figure out if your manager relationship is OK or bad - There is a big difference between the 2. If it's "OK", this seems like a chance worth taking. If it's "bad" then you will likely fall into the nightmare scenario you mentioned if you don't pass.
2. Deduce the interview structure - Do extensive research into what this other team does, how engineers add value within it, and overall company policy (+ anecdotes) on internal interview structure. If you feel like you have a 70%+ chance of passing, you should probably take the chance.
3. Gauge the quality of the other team - Grass is always greener on the other side. Figure out if the team is truly great (supportive manager + TL, good scope, product space you enjoy, etc) or if it merely seems great because you aren't content with your current team. Here's some resources to help with that:
   1. [Masterclass] How To Choose A Good Company And Team As A Software Engineer
   2. [Masterclass] What Software Engineers Should Look For In Their Engineering Manager

Best of luck! Every worker deserves a supportive team around them.

Sorry to hear this - I empathize with you a lot. Unfortunately this policy is quite common among 99% of tech companies: Internal mobility is sadly something most places don't invest in as they don't think it's worth the organizational thrash. It's definitely anti-worker, and these policies are only going to be more strict in a bad economy like this one where the leverage shifts from the worker to the boss.

In terms of action plan, this is really up to you - It's a tough call to make. You have the following options:

1. Take the leap of faith and do the internal interview
2. Tough it out on your current team
3. Leave the company (hardest option right now in the current market)

For #1, Scott is more or less spot-on: Speak positively and in a bridge-building (or at least maintaining) way when discussing this with your manager. Follow the communication tactics here: "How can I gracefully leave my job?"

For #2, I recommend this: [Taro Top 10] How To Create Scope As An Engineer

For #3, check these out: [Taro Top 10] Finding A Tech Job

Awesome advice, thank you Scott & Alex!