• BCRA to raise quickly next time CPI inflation comes at 7.0% m/m or close
• BCRA needs to keep monthly effective rate and crawling peg closely in step with inflation to reduce export delay and portfolio dollarization incentives
• Unsustainable deficit+debt dynamics keep BCRA from pursuing positive real rates or depreciation
• BCRA can only passively respond to rising inflation, this status quo likely remains until regime change

The BCRA's future monetary policy rate decisions will remain bounded by the evolution of effective inflation, expected inflation for the short-term, and the interest rate limitations the central bank faces if it is to keep the official real exchange rate steady in the coming year, which is something the bank is paying close attention to. The BCRA hiked its benchmark 28-day bill rate by 300bps to 78.0% in mid-March to accommodate the monthly effective rate at 6.5%, up from 6.3%, in what was the first move for the rate since last September. The decision was taken following the release of a surprisingly high 6.6% m/m CPI inflation print for February and with market expectations of a similar reading for March. The BCRA is likely to raise another 200bps or 300bps if the CPI reading for March is close 7.0% m/m, unless high-frequency price trackers show a deceleration in early April.

Monetary policy has been passive for most of the past three years, sitting under the weight of massive fiscal dominance and past policy mistakes, and there are no prospects for this to change until the end of this government in December. To put it in short, the BCRA needs to keep its monthly effective benchmark rate and the official exchange rate crawling peg moving right in step with CPI inflation, and it doesn't have room to deviate much or for too long, which means monetary policy should be fairly predictable this year. The BCRA has slightly more room to delay rate cuts if inflation declines than it has room to delay rate hikes if inflation rises, but it seems very unlikely that inflation will decline this year anyway.

The dangerous inflation spiral and the massive real exchange rate appreciation that took place in 2021-22 put pressure on the BCRA to raise nominal interest rates and push the pace on the crawling peg when inflation rises. If the crawling peg lags versus inflation, the government would be increasing the incentives for exporters to withhold sales abroad and wait for an inevitable devaluation, while also reducing competitiveness (most exporters are forced to convert their FX income into local currency). This would add to an FX market crisis that has the government burning through its low FX reserves. However, if the nominal crawling peg is to move faster, interest rates also need to rise in step to avoid creating incentives to delay exports. Interest rates that at least match inflation are also key to discourage portfolio dollarization through parallel exchange rates, which are an increasingly important benchmark for price-setting practices.

The BCRA also needs to be careful of not going too high with real rates because it would contribute to the explosiveness of public debt dynamics and inflation. With the government running a fiscal deficit of more than 4.0% of GDP every year despite having virtually no access to market financing, the deficit has been covered by a mix of inflation tax and central bank balance sheet deterioration. The higher the real interest rate goes, the faster the deterioration of the central bank's balance sheet and the growth of the federal government's short-term debt. However, the evolution of market financing for the government and the BCRA's remunerated liabilities suggests that the room to get financing through these avenues is pretty much closed now, which only leaves inflation tax as an option. In this scenario, nominal interest rate hikes are inflationary as long as there are no drivers to increase the private sector's willingness to finance the government.

• MPC meeting: Dec 11, 2024
• Current policy rate: 11.25%
• EmergingMarketWatch forecast: 50-bp hike (to 11.75%)

The BCB launched its tightening cycle in September as inflation pressures mount and inflation expectations became unanchored from the target. That led the BCB to hike first by 25bps on Sep 18 and then to follow that up on Nov 6 with a bigger 50bps hike. The latest inflation data, if anything, add further pressure. IPCA-15 inflation accelerated to 4.77% y/y in 12-terms to mid-November, exceeding the 4.50% upper limit of the +/- 1.50-pp fluctuation band around the BCB's inflation target for the first time this year and consolidating expectations that inflation will not meet the target in 2024, according to data released on Nov 26. Additionally, inflation expectations are rising as well, moving further above the BCB's 3.00% target. Case in point: analysts polled by the BCB this past week raised their inflation forecast to 4.34% for end-2025, 3.78% for end-2026, and 3.51% for end-2027. As inflation forecasts increase, the Copom is expected to raise the Selic rate by for a third consecutive time on Dec 11, hiking its policy rate by 50bps to 11.75% at its final policy meeting in 2024.

Fiscal uncertainty has also played a key role in the de-anchoring of inflation expectations and, consequently, in monetary policy decisions. The government focused on increasing revenue during its first two years in office but has had to recently shift focus to expenditure cuts. The economic team has been preparing a robust fiscal package to reduce spending, but as more stakeholders joined the discussion, the announcement has been postponed since early November. Finance Minister Fernando Haddad said Nov 25 that the package had been finalized with President Lula da Silva, and the next step before publicizing it would be to present the measures to House and Senate leaders, as congressional approval will be required. Although the government is expected to meet its primary deficit target for this year (set at zero with a +/- 0.25% of GDP tolerance margin), concerns about rising public debt and the sustainability of the fiscal framework are expected to keep pressuring monetary policy until a positive fiscal shock is delivered.

Overall, the Copom is expected to increase the Selic rate by another 50bps at its final policy meeting of 2024, bringing the key rate to 11.75%. As fiscal uncertainties persist, near-term inflation expectations are rising, potentially affecting the duration and peak of the current tightening cycle. However, this is unlikely to alter the upcoming policy decision, in our view. The Copom is, however, projected to continue raising the Selic rate until May 2025, when it is expected to peak at around 13.00-13.50%. We note that the size and specifics of the government's fiscal package could influence the ongoing tightening cycle in either direction: worsening expectations and necessitating a more hawkish stance from the Copom, or alleviating fiscal uncertainties and reducing pressure on long-term monetary policy.

• Next MPC meeting: Dec 19, 2024
• Current policy rate: 4%
• EmergingMarketWatch forecast: Hold

Rationale: The 25bp cut delivered in November is likely the last one to be seen in 2024, given rising inflation pressure and still sticky service price inflation. The tone of the CNB board turned more hawkish again, and recent data has supported a more cautious stance. While the economy has been recovering at a much softer pace than previously anticipated, concerns about inflation being elevated will likely prevail at the final MPC meeting in 2024. Eva Zamrazilova already voted for a pause in November, and she communicated this was an option before the MPC meeting. Regarding the rest, the rationale was that monetary policy was still restrictive, and we have reasons to believe that, given that real interest rates are still positive, though at their softest level since the beginning of 2024.

Meanwhile, it was Tomas Holub who voted for a 50bp cut, which means his vote is not relevant for monetary policy in the long term. The reason for that is his departure from the CNB board at the end of November, as he chose not to seek a second term on the board. Holub will be replaced by Jakub Seidler, currently the chief economist of the Czech Bank Association (CBA), who has similar monetary policy views. Yet, even Seidler has been speaking about how inflation has had some sticky elements lately, which implies he will not be willing to push for a rate cut in December.

The minutes from the MPC meeting in November confirm our impressions, as there was clearly an emphasis on price stability over economic growth. Sticky service price inflation was outlined as an upside risk, and several board members expressed doubts that volatile prices will provide enough correction to underlying price pressure. There were also concerns about a weak CZK, which could exert pressure through import prices. Some board members suggested that a new external price shock could unlock a second inflation wave. There were plenty of remarks of how the outlook for core inflation, which excludes regulated and volatile prices, still put it above the 2% target, at 2.5% in both 2024 and 2025. Moreover, the latest staff forecast now sees headline inflation converging to the target in early 2026, rather than in H1 2025.

Regarding available data, the October CPI print was almost entirely in line with the CNB forecast this time. The forecasting model was revised yet again, accounting for a higher impact of food prices, and thus far, this has paid off. Yet, it also means that inflation will remain elevated, and likely above the upper end of the CNB's tolerance band (2%+/-1pp) at the end of 2024. Regulated prices will be the factor driving inflation in late 2024, mostly due to a base effect, and food prices will take over in early 2025, maintaining the headline print high. Food prices may even surprise on the upside in Q4 2024, as data on agricultural producer prices implies renewed pressure. Meanwhile, core inflation will remain elevated as well, indicating that underlying inflation pressure is still high. CNB governor Ales Michl said outright that core inflation should be slightly below 2% before the CNB can guarantee that the inflation target will be met, and this will not happen soon.

Given that premise, we just don't see how the CNB board can support another cut in December. While core inflation is not expected to pick up much more, the headline print will remain high, which will likely tie the hands of the CNB board. Furthermore, we expect that the board's hawkish stance will carry over to 2025, and we now expect no more than two 25bp cuts next year. We may see a 25bp cut next February, but only if inflation is in line with the forecast and economic recovery is still weaker than anticipated. The cut could be pushed to March in case data is not supportive of easing inflation pressure. In general, we anticipate one 25bp cut in each of Q1 and Q2 2025, after which the easing cycle will likely pause, at least until the end of 2025.

We don't completely rule out a third 25bp cut in 2025, but if it happens, it will be likely in Q4 2025, provided that the dust has settled by then. Given how geopolitical risks have remained high, we don't have that in our base scenario. For example, broad trade tariffs introduced by the Trump administration will be one such external shock that may keep underlying inflation pressure elevated throughout 2025. We have been seeing assumptions that tariffs can be introduced in late 2025 at the earliest, but we consider such a scenario as too optimistic. Trump means business this time, and he is forming a cabinet of loyal people, so we expect to see a major policy shift sooner, rather than later. We don't believe Europe is prepared for this, and an open economy like the Czech one is particularly exposed to such price shocks.

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Further Reading:

CNB board statement from latest MPC meeting, Nov 7, 2024

Post-meeting press conference, Nov 7, 2024 (in Czech)

Q&A after the latest MPC meeting, Nov 7, 2024

Minutes from the latest MPC meeting, Nov 7, 2024

Monetary Policy Report, November 2024

Macroeconomic forecast, November 2024

Meeting with analysts, Nov 8, 2024

CNB board profile

CNB board members' presentations, articles, interviews (Czech)

CNB board members' presentations, articles, interviews (English)

• Next MPC meeting: Nov 21, 2024
• Current policy rate: 27.75%
• EmergingMarketWatch forecast: 27.75%

The MPC will hold a regular rate-setting meeting on Nov 21, and we believe the committee will hold the rates again. While inflation came significantly better than expected in each month between March and July, it quickened in August, September, and October reflecting the fuel and energy price adjustments. Further, the central bank said the latest fuel price adjustment was not fully captured in the October CPI print and will push inflation higher in November. While core inflation eased slightly in October, it remains elevated at around 24% y/y, pointing towards strong inflationary pressures in the economy. The MPC said last month that the gradual unwinding of food inflation along with the improvement of inflation expectations since the start of 2024 suggest that inflation remains on a downward trajectory, albeit restrained by the drag of fiscal measures. The MPC expects inflation to remain near current levels until end-2024 but sees a significant easing in H1 2025 due to monetary policy tightening and favourable base effects. The MPC, however, noted that the persistence of regional tensions, elevated international commodity prices, and higher than anticipated pass-through of fiscal measures pose risks to disinflation path.

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Taking into consideration the global uncertainty, the elevated inflation and Egypt's increased reliance on portfolio inflows, we believe the MPC will hold the rates in November and December. The MPC has delivered a massive 19pps interest rate increase and 400bps increase in the required reserve ratio since March 2022, but the MPC must keep a tight stance because consumer inflation remains broad-based, reflecting FX pass-through, surging food prices, supply line disruptions, and robust monetary expansion.

Monetary Policy Committee Statement

Monetary Policy Review

Monetary Policy Committee Meeting Schedule

• Next MPC meeting: Dec 17, 2024
• Current policy rate: 6.50%
• EmergingMarketWatch forecast: Hold
• Rationale: Forint depreciation, increased risk aversion towards emerging markets to prevent further rate cuts

The MPC is likely to keep the policy rate on hold for a prolonged period of time, according to its latest policy guidance. The MPC voted for no change in the policy rate on its November meeting, similarly to the previous month, citing increased risk aversion towards emerging markets and related risks to the inflation outlook. The monetary policy guidance remained similar to the previous month and the MPC highlighted the need for further pause to the rate cut cycle because of financial market volatility. The wording of the guidance, however, suggested that financial market volatility and the forint depreciation in particular took the upper role as factors for the rate decision, in our view. In particular, the MPC omitted inflationary risks related to global energy prices from its guidance, instead focusing on higher risk aversion towards emerging markets and slower than expected monetary easing by global central banks. The MPC reiterated that policy decisions will be taken with a cautious approach, depending on incoming data, usually suggesting that policy moves will be considered on a month-by-month basis. The overall tone, however, suggested that rate cuts may not realistically appear on the agenda soon, especially since NBH deputy governor Barnabas Virag highlighted the need to keep monetary policy restrictive. We interpret his statement to suggest a need for slower loosening domestically compared to big central banks, since he added that such policy would raise the yield spread. The strategy mainly aims to support the forint exchange rate amid recent depreciation, in our view.

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The rate decision in November was not unanimous though and the monetary policy outlook is complicated by favourable inflation readings. One member supported a rate cut in November, Virag revealed. He acknowledged that inflation was weaker than expected but warned that pro-inflationary risks increased due to the recent forint depreciation, the higher-than-average repricings in the food sector and government plans for excise tax hikes next year. We therefore think that the view in favour of rate cuts within the MPC is not likely to gain much traction in the next months, especially if the slowdown in services inflation proves temporary due to one-off telecom price cuts in October.

Post-meeting MPC statement from November rate-setting meeting

Presentation of Barnabas Virag on press conference after November MPC meeting

Minutes from October rate-setting meeting

Latest Inflation Report - Q3/2024

MPC meeting calendar 2024, 2025

• Next Policy Meeting: December 4-6, 2024
• Current Policy Rate: Repo Rate at 6.5%
• Last Decision: Hold (October 9, 2024)
• Our Forecast: Hold
• Rationale: Persistent inflationary pressures and expectations of further price increases suggest that the RBI will maintain the repo rate at 6.5% in December.

At its October 9 meeting, the Reserve Bank of India's Monetary Policy Committee (MPC) voted unanimously to maintain the benchmark repo rate at 6.5%, alongside holding the standing deposit facility (SDF) rate steady at 6.25% and the marginal standing facility (MSF) rate at 6.75%. This session marked the debut of the newly appointed external members, whose contributions brought a novel dimension to the deliberations.

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The Monetary Policy Committee (MPC) reaffirmed its commitment to the medium-term inflation target of 4%, underscoring the need for vigilance in the face of price volatility. Governor Shaktikanta Das flagged geopolitical tensions, fluctuating global oil prices, and domestic food supply disruptions as key risks to the inflation outlook. With October's Consumer Price Index (CPI) inflation climbing to 6.21% y/y, the Reserve Bank of India (RBI) is expected to adopt a cautious tone, indicating that rate cuts are unlikely in the near future as it prioritises price stability.

Economic Growth

India's economy continues to chart a steady growth path but remains under pressure from several headwinds. Real GDP grew 6.8% y/y in Q1 FY25 (April-June), falling short of the 7% forecast by analysts. The slowdown was attributed to reduced government expenditure in the lead-up to the 2024 general elections and muted private investment amidst elevated borrowing costs.

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Despite these challenges, domestic consumption has shown resilience, bolstered by robust urban demand and improving employment trends. The industrial sector regained momentum in September following a contraction in August. However, growth in Q2 FY25 is expected to remain tepid, constrained by September's seasonally weak consumption patterns and disruptions caused by heavy monsoon rains.

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The Reserve Bank of India (RBI) forecasts GDP growth at 7.2% for FY25, supported by accelerated infrastructure investments and production-linked incentive schemes aimed at bolstering manufacturing. However, downside risks loom large, driven by persistent inflationary pressures, geopolitical uncertainties, and a sluggish recovery in global trade. Rating agencies have presented more cautious projections, aligning with broader expectations of growth falling slightly below 7% year-on-year in FY25. Analyst forecasts suggest growth is likely to come in around 6.5-6.8% for Q2, which will also give the RBI pause.

Inflation

Inflation remains a critical concern. After moderating to 3.5% in July, Consumer Price Index (CPI) inflation surged to 5.5% in September and further to 6.21% in October, exceeding the RBI's upper tolerance threshold. Rising food prices, exacerbated by erratic weather patterns and supply chain disruptions, have been the main driver of this uptick.

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In response, the government has implemented measures such as releasing strategic reserves of wheat, rice, and sugar to stabilise prices. Despite these efforts, external risks-including volatile global oil prices and escalating geopolitical tensions, particularly in the Middle East-pose significant upside risks to inflation. The RBI is expected to remain vigilant, balancing growth objectives with the need to anchor inflation expectations.

The RBI expects CPI inflation to average 4.5% for FY25, but headline inflation may stay elevated in Q4 2024, with projections of 4.8% in Q3 and 4.2% in Q4. While the MPC maintains a neutral stance, it is unlikely to pivot toward rate cuts until inflation shows consistent moderation.

Financial and External Sector

India's banking system remains stable, with credit growth averaging 18.8% y/y in 2024, driven by demand from services, personal loans, and infrastructure projects. Foreign exchange reserves reached a record high of USD 682.1bn as of early November, providing a buffer against external shocks. Despite a widening current account deficit (CAD) to 1.1% of GDP in Q1 FY25, strong remittance inflows and resilient service exports have kept the external position manageable. Foreign portfolio inflows surged, with USD 19.2bn net inflows recorded from June to October, reflecting improved investor sentiment.

Outlook

The government's FY25 budget aims to stimulate economic activity through a combination of tax incentives and substantial infrastructure investments. However, the effectiveness of these measures may be tempered by persistent high inflation and elevated borrowing costs, which continue to weigh on consumer and business sentiment.

The RBI is expected to maintain a cautious stance at its December policy meeting, opting for a wait-and-watch approach as inflation risks remain elevated. The recent resurgence in inflation, coupled with the potential for imported price pressures stemming from volatile global oil markets, has diminished the likelihood of a near-term rate cut. While initial forecasts pointed to monetary easing by the end of the year, such action now appears more probable in early 2025, contingent upon a clear and sustained decline in inflation and a stable global economic backdrop.

In the near term, the RBI's focus is expected to remain firmly on price stability, even as growth challenges persist. Navigating this delicate balance amid ongoing geopolitical and economic uncertainties will likely shape its policy trajectory, underscoring the central bank's resolve to safeguard macroeconomic stability.

Further Readings

Monetary Policy Meeting Statement, October 2024

Reserve Bank of India Consumer Confidence Survey, Oct 2024

Reserve Bank of India Household Expectations Survey, Oct 2024

Minutes of the Monetary Policy Committee Meeting, Oct 2024

• Next policy meeting: Dec 17-18
• Current policy rate: 6.00%
• Our forecast: Hold
• Last decision: Hold (Nov 19-20)
• Rationale: Rupiah's stability is the main determinant of monetary policy now that inflation is within the target band

We expect Bank Indonesia to remain on hold in December, after keeping the key rate flat at 6.00% in the last two MPC meetings. The central bank cut the key rate only once on Sep 18, after which external geopolitical developments forced it to pause its monetary easing cycle. As a result, another potential rate cut could likely be postponed to Q1 2025, given the growing pressure on the rupiah.

The rupiah's stability is the main factor behind MPC decisions at present, with inflation being a secondary concern as it remains within the new target band of 2.5+/-1% (or 0.5pp lower than in 2023). On the positive side, the rupiah gained some ground against the USD in August and early September, but it has since resumed its downward trend due to the rising tension in the Middle East and Trump's win at the US presidential election. The latter has led to the strengthening of the dollar and shifting market expectations towards more gradual easing by the Fed.

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GDP growth

GDP growth slowed to 4.95% y/y in Q3, down 5.05% y/y in Q2, which marked the second slowdown in a row. Still, the central bank projects GDP growth at 4.7-5.5% in 2024, up from 4.5-5.3% in 2023. The stronger growth will be driven mainly by domestic demand, with both private consumption and investment set to gain some pace. Overall, domestic demand is by far the main economic growth driver, with consumption in particular contributing to the solid GDP expansion. Looking forward, BI expects GDP growth to accelerate in 2025, though it has not provided a numerical forecast at this point.

So far, there seems to be little impact on GDP growth from monetary tightening as it is close to the 5% long-term average growth rate. Most IFIs and rating agencies also expect GDP growth of about 5.0% in the medium term. The WB expects expansion by 5.1% in each of 2025 in 2026. Fitch predicts growth of 5.2% next year and 5.1% in 2026. S&P's growth projections are 5.0% for 2025 and 4.9% for 2026.

Exchange rate stability

The rupiah depreciated a lot in the first half of the year, losing as much as 5-6% by early July, before reversing the trend since. It did particularly well in August and September, erasing the depreciation fully and in fact gaining 0.4% against the USD by mid-September. However, it resumed its downward trend since the Middle East tension escalated, particularly between Israel, Iran and Lebanon, which led to renewed pressure on EM currencies.

Moreover, Trump's win in the US presidential election led to a surge of the US dollar, which put pressure on all EM currencies. Market expectations for the Fed's monetary polity also shifted towards a more gradual easing, as inflation is expected to remain elevated due to Trump's policy agenda.

In Indonesia, the rupiah's stability has been the main factor behind recent key rate decisions, with its depreciation leading to rate hikes earlier this year, while the latest gains led to a rate cut perhaps sooner than expected. As a result, the BI was also forced to react to the recent depreciation of the local currency, delaying its monetary easing.

The BI governor considers the foreign exchange intervention and the use of Bank Indonesia Rupiah Securities (SRBI) sufficient to address the local currency's weakness. Hence, the central bank sold a large volume of SRBI to attract portfolio inflows. The governor stated that Bank Indonesia will continue to use its tools to keep the local currency stable.

Inflation environment

CPI inflation slowed to 1.71% y/y in October from 1.84% y/y in September. This was the slowest inflation rate since Oct 2021. The central bank's target range is 2.5+/-1%. On the other hand, core inflation accelerated slightly to 2.21% y/y in October from 2.09% y/y in September.

The slowdown of headline CPI growth in recent months came on the back of food prices. Most categories saw little change in price dynamics, while there was some inflationary pressure from personal care and education prices.

Bank Indonesia expressed confidence that CPI inflation will remain under control and within the target band this year. This projection looks realistic, in our view, especially given the recent appreciation of the rupiah, which further lowered the pressure from imported inflation.

Conclusion

Looking forward, we expect BI to remain vigilant regarding further rate cuts, due to the renewed pressure on the rupiah. As a result, the next rate cut could take place in Q1 2025, in our view, provided that the rupiah manages to regain some of the recent losses.

The pace of the Fed's monetary easing will also play a key role, as further delays on the Fed's side would inevitably lead to the BI remaining on hold for longer, in our view.

Further reading

Last MPC press release

Calendar of MPC meetings for 2024

Next MPC meeting: December 12

• Current policy rate: 10.25%
• EmergingMarketWatch forecast: 25 bps cut

In the context of few monetary policy news, the CB's quarterly report, to be published on Wednesday, and the CB's monetary policy minute, to be published on Thursday, are likely to stand out as the main clues towards future monetary policy decisions. We expect the minute to come with a dovish tone, with at least two board members saying there are conditions to ponder faster monetary easing ahead. However, we believe no faster easing should be anticipated considering a clouded outlook because of a protectionist discourse held by US President-elect Donald Trump.

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The currency depreciated in the context of these comments, standing at USD/MXN 20.61 at the time of this writing. However, we anticipate the currency would weaken much further if Trump were to move ahead with a 25% tariff on Mexican goods, as he threatened. Indeed, we believe the market does not believe such tariff will be imposed on all trade, but the depreciation does show increased uncertainty and the negative impact this might have on investment.

We note CB Governor Victoria Rodríguez anticipated the CB board may ponder faster monetary easing because of ongoing disinflation, in a an interview published last week. However, we doubt she'll be able to build a consensus in the Monetary Policy Council (MPC) in this regard, considering the mentioned uncertainty and the fact that two board members only agreed to the easing cycle recently, standing on the fence because of stubborn service prices.

All in all, we continue to expect the CB will be cutting the Monetary Policy Rate (MPR) by 25bps in its December sitting. We expect the Monetary Policy Council (MPC) to make such a decision unanimously. Indeed, conditions seem set for further monetary easing, considering ongoing disinflation, and a recent deceleration of service prices.

We see no conditions for a 50bps cut in December.

Looking at 2025, the CB is set to cut its policy rate continuously and unanimously. We expect such easing to be gradual. However, the monetary policy outlook is clouded because of the tariff threats by the incoming US administration.

Overall, we fully expect the CB to cut its policy rate in upcoming sittings. We expect a new 25bps cut in December, bringing the MPR down to 10.00. We expect the CB will be cutting its policy rate constantly next year, bringing the policy rate to 8.00% by 2025-end. Financial volatility, in the context of a protectionist policy coming from the US could change our projection, hindering continuous easing ahead.

• Next MPC meeting: 25 - 26 November 2024
• Current policy rate: 27.25%
• EmergingMarketWatch forecast: 27.75% - 28.25%

The CBN will hold the final 2024 meeting of the MPC on November 25 and 26. At the September meeting, the MPC raised the monetary policy rate by 50bps to 27.25%, marking the fifth consecutive hike this year. Under the leadership of governor Yemi Cardoso, the CBN has raised the benchmark interest rate by a total of 850bps this year. Cardoso has repeatedly emphasized that the CBN will continue to implement orthodox monetary policies to tackle inflation and stabilize the economy. Data from the National Bureau of Statistics shows that the inflation rate for October stood at 33.88%, up from 32.7% in September. This marks a four-month high, reflecting increasing food prices, higher energy costs, supply chain disruptions in agriculture and continued foreign exchange volatility. Despite the usual boost from the October harvest season, food inflation remains a significant concern, rising to 39.16% in October compared to 37.77% in September. The real policy rate is still negative and the MPC has emphasized the need to turn it positive to boost investment. We believe that the MPC will raise the policy rate at the November meeting due to continued price pressures.

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Nigeria's foreign exchange market remains unstable, according to Fitch Ratings this month in their latest assessment of Nigeria. The global rating agency stated that recent CBN initiatives, including unifying multiple exchange rate windows into a single rate and clearing a significant backlog of foreign exchange obligations, have yet to bring lasting stability to the naira. Fitch raised concerns over the true net reserves, as approximately a quarter of current gross reserves are tied to FX swaps with local banks, adding uncertainty to Nigeria's FX market outlook. Fitch Solutions projects that the naira will depreciate to as low as NGN 1,993 per dollar by 2028. Since June 2023, the naira has depreciated by 70%.

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The Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA) recently criticized the CBN's high interest rates, describing them as a sign of a central banking system disconnected from the needs of businesses. The latest Purchasing Managers' Index report from Stanbic IBTC Bank highlights growing challenges for the Nigerian private sector as inflationary pressures intensify, triggering a contraction in both demand and business activity. Local experts argue that monetary tightening alone cannot resolve Nigeria's structural challenges. Supply bottlenecks, import dependency and poor domestic production remain critical issues. Analysts advocate for a mix of fiscal measures to boost local production, improve security in farming regions and stabilize energy costs. Targeted subsidies and increased social welfare spending have provided short-term relief, but economists warn of prolonged inflation without comprehensive reforms. However, like Cardoso, the other MPC members seem set on maintaining a tight monetary policy. All present MPC members voted for a rate hike in September.

Monetary Policy Committee Statement

Monetary Policy Committee Meeting Schedule

• Next policy meeting: 16 Dec, 2024
• Current policy rate: 15.0%
• Last decision: Cut by 250bps (Nov 4)
• Our forecast: Cut by 100-150bps
• Rationale: Bening inflation outlook and improved external position to prompt the central bank to cut key rate

The State Bank of Pakistan (SBP) on Nov 4 cut the policy rate by 250bps, exceeding market forecasts, citing lower-than-expected inflation for the aggressive decision. A stable external sector further bolstered the SBP's confidence. The benchmark interest rate now stands at 15.0%, the lowest since Oct 2022, down from an all-time high of 22.0% in early June, which will aid economic growth besides lowering borrowing costs, thereby reducing the government's debt servicing costs and helping accelerate its fiscal consolidation efforts. The real interest rate is still significantly positive, on both a spot and forward-looking basis. Therefore, the monetary policy stance is considered restrictive, which is in line with the conditions set by the IMF under its USD 7bn Extended Fund Facility. Having said that, we anticipate more rate cuts.

Inflation environment

Inflation has been modest for the last few months, averaging 8.7% y/y in the first four months (Jul-Oct) of FY25. In October, it clocked in at 7.2% y/y, edging up from a 44-month low of 6.9% y/y in September. The SBP attributed the slowdown to muted demand, better farm supplies, lower global oil prices and favourable base effect. Moreover, a stable currency has also kept the cost of imports in check. Subsequently, the central bank became more confident that average inflation is likely to be much lower than its previous forecast range of 11.5%-13.5%, down from 23.4% in FY24.

SBP governor Jameel Ahmed in a post-policy media briefing said that the central bank will release its updated inflation estimate in January. To note, the IMF forecasts inflation at 9.5% in this fiscal year. Higher gas tariff, expiry of power subsidy and likely spillover from taxation measures announced in the FY25 budget may pose upside risks to inflation.

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External sector

Pakistan's external position has strengthened considerably, anchored by the IMF bailout package, which the SBP said has improved the prospects for realization of planned external inflows. Further, the current account remained in surplus for the second month in a row in September, which kept the current account deficit contained at USD 98mn in the first quarter (Jul-Sep) of FY25. Ahmed said that the current account would continue to post a surplus in October on the back of healthy workers' remittances, which he said crossed the USD 3bn mark last month. The central bank sees the CAD in the range of 0-1% of GDP in this fiscal year as the pick-up in imports is expected to be offset by higher workers' remittances and exports.

Supported by loan inflows from IMF and other multilateral agencies, SBP forex purchases from the interbank market and bilateral debt rollovers, the central bank's foreign exchange reserves rose to USD 11.7bn as of Oct 25. The central bank expects USD 500mn from the Asian Development Bank this week, Ahmed said, adding forex reserves are likely to reach USD 13bn by June 2025.

It is noteworthy that the IMF pegs Pakistan's external financing requirement in FY25 at a multi-year low of USD 18.8bn, including USD 3.6bn CAD and USD 13.7bn in debt amortization. The SBP governor revealed that the country's debt-related outflows, i.e., both principal and interest payments, amount to USD 12bn in the ongoing fiscal year, of which USD 5.7bn has already been repaid. This is lower than USD 13.5bn external debt servicing recorded in FY24.

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GDP growth

The SBP assessed that economic activity has picked up due to better-than-anticipated production of rice and sugarcane and higher factory output, particularly in the textile, food, automobile and allied industries. It maintained its GDP growth forecast at 2.5%-3.5% for FY25. The IMF forecast growth to expand by 3.2% in this fiscal year, recovering from 2.4% growth in FY24.

The economy expanded at a quicker-than-expected rate of 3.1% y/y in the Apr-Jun quarter of 2024, led by bumper crops and robust activity in the services sector. It was also the fastest pace of growth in two years.

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Conclusion

We expect the SBP's rate-cutting cycle to continue but at a much slower pace. There is room to slash the policy rate by another 250-300bps. Further reduction would be discouraged by the IMF, which has urged the central bank to "pursue a tight monetary policy stance".

• Next monetary policy meeting: Dec 19
• Current policy rate: 6.0%
• EmergingMarketWatch forecast: Hold or 25bp cut
• Rationale: Comments by Governor Remolona; slower-than-expected GDP growth in Q3; peso depreciation

We think that a hold decision and a 25bp policy rate cut are both possible at the next meeting of BSP's Monetary Board (MB) on Dec 19. In October, the MB lowered the BSP's target reverse repurchase (RRP) rate by 25bps to 6.0%. This was the second consecutive 25bp cut after the one in August.

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BSP Governor Eli Remolona said earlier this week that they are still in the easing cycle, so they will cut the policy interest rate either in December or in the next meeting (the first one for 2025). The decision will depend on data. He added that further reductions will likely total about 100bps. Remolona favours rate reductions by 25bps.

In December, the BSP will pause the easing if there are indications of inflationary pressures, but weak economic growth will prompt the central bank to cut rates, the governor said. November inflation will likely be within the target range of 2.0-4.0%, according to him.

Inflation

CPI inflation speeded up to 2.3% y/y in October from 1.9% y/y in September. The CPI rose by 3.3% y/y in Jan-Oct.

The central bank's baseline forecasts expect inflation to settle at 3.1% this year, 3.2% next year and 3.4% in 2026.

The BSP Survey of External Forecasters for October showed that inflation expectations continued to be well-anchored, the central bank said in its highlights of the MB meeting held on Oct 16. Compared to the September survey, the mean inflation forecasts for 2024 and 2026 were steady at 3.4% and 3.2%, respectively. The mean inflation forecast for 2025 slightly decreased to 3.0% from 3.1%. Analysts view the inflation risks as broadly balanced. Headline inflation is anticipated to stay low and within target over the policy horizon.

Economic growth

The GDP increased by 5.2% y/y in Q3, slowing down from revised 6.4% y/y in Q2, the statistics office said on Nov 7. The latest reading is below the 5.7% growth expected in a Reuters poll. In seasonally adjusted terms, the GDP increased by 1.7% q/q in Q3, after rising by 0.7% q/q in Q2. In cumulative terms, the GDP rose by 5.8% y/y in Jan-Sep. The government targets economic growth in the range of 6-7% for 2024.

The Philippine economy expanded by 5.5% in 2023.

The IMF has lowered its projection of 2024 GDP growth in the Philippines to 5.8% from 6.0% expected in July, according to the IMF's World Economic Outlook released in October. The 2025 forecast has been trimmed to 6.1% from 6.2%.

LFS, loan growth

The unemployment rate was 3.7% in September, down from 4.0% in August and 4.5% in Sep 2023, according to the results of the latest Labour Force Survey (LFS). In the y/y comparison, the number of unemployed decreased by 16.4% y/y to 1.89mn. The number of employed rose by 4.6% y/y to 49.87mn. The labour force hence climbed 3.7% y/y to 51.77mn.

Outstanding loans of universal and commercial banks, net of reverse repurchase (RRP) placements with the BSP, rose by 11.0% y/y to PHP 12.40tn at end-September, accelerating from 10.7% y/y growth at end-August. Annual loan growth has been in the double digits for the fifth month in a row.

Exchange rate

The peso is trading at USD/PHP 59.035 at the time of writing, which compares with USD/PHP 57.74 on Oct 16, the date of the previous MB meeting, and USD/PHP 55.388 on Dec 29, 2023.

Earlier this week, Remolona said that the BSP is intervening "a little bit" in the FX market. He said they would only intervene to smooth sharp exchange rate movements. The governor said that they worry about the pass-through effect on consumer prices.

Further reading

Press release after October 2024 monetary policy action

Schedule of monetary policy meetings

Highlights of MB meetings on monetary policy

Monetary Policy Report

• Next MPC meeting: Dec 3-4, 2024
• Current policy rate: 5.75%
• EmergingMarketWatch forecast: 5.75%

Rationale: The Monetary Policy Council is nearly united on the fact interest rates should remain flat at present as inflation has been lifted by the partial phasing out of the anti-inflation measures on energy, but it looks like it is dividing to some degree on the outlook for rate cuts in 2025. NBP and MPC chair Adam Glapinski said at his monthly presser last week that there has been no change to the prospect that rate cuts will be discussed from March 2025, which is when the NBP releases a new inflation projection and extends the policy horizon to 2027. But he did also note that heavy uncertainty as it remains unclear what the government will do with power prices in 2025. He also led the MPC to produce an analysis of the 2025 budget which decries the looseness of fiscal policy, saying the large fiscal deficit limits the room for monetary easing.

Earlier this week, MPC member Ireneusz Dabrowski, who normally sounds dovish, said on Nov 12 that the loose fiscal policy was one main reason that the council will probably not begin cutting interest rates until July 2025 (which is when the inflation projection will be updated following the March version). Dabrowski added that stubborn inflation was another reason, though did base this view on the no-policy change assumption. That would see inflation rise in January as the anti-inflation measures would be lifted, the current no-policy scenario. But the government is very likely to pass a continuation of anti-inflation measures, especially as PM Donald Tusk said over the weekend that he had directed Finance Minister Andrzej Domanski to prepare the package. There was also some draft legislation reported that said an economic advisory to the cabinet had backed extending the current power price cap of PLN 500 per MWh as well as keeping the capacity fee exemption. The final decision seems likely to be released in the near future.

That power prices will continue to be kept artificially low suggests inflation won't peak above 6% y/y in Q1, as shown in the November inflation projection, but will rather be just above 5% and will then be near the top end of the fluctuation band around the +/-1-pp 2.5% inflation from Q3. This fact seems to have influenced MPC member Cezary Kochalski to say on Nov 13 that rate cuts would still be discussed in March 2025 and might be supported.

Overall, we continue to believe that March 2025 might be too early for a cut since the actual path of inflation in Q1 2025 won't be clear, but anything in Q2 will see more clarity. Glapinski has said the MPC won't cut rates unless inflation stabilises and is forecast to come down. That won't be possible unless the inflation prints are known.

Archived video of all MPC press conferences

MPC's post-sitting statements

Latest council minutes

Latest NBP inflation report (July 2024)

Most recent MPC voting results

• Next MPC meeting: Dec 26, 2024
• Current policy rate: 50.0%
• EmergingMarketWatch forecast: Cut by 1.0-2.0pps conditional on November CPI figures
• Rationale: Anticipated core inflation improvement gives CBT room to cut rates

The CBT is getting ready for a limited decrease in the policy rate in December by 100bps to 200bps depending on the November CPI figures, in our view. Amid expectations of a continued surge in unprocessed food prices for November, the CBT projected an improvement in the underlying inflation trend when these volatile components are excluded, based on its recent MPC meeting. This perspective, in our assessment, implies that, despite a lack of significant progress in headline inflation figures, the CBT is prepared to proceed with interest rate reductions, relying on the anticipated slowdown of core inflation indicators. Additionally, the MPC emphasised a growing harmonisation with fiscal policy and we think such an alignment would provide the CBT with more leeway in monetary policy decisions by limiting backward-looking indexations, feeding into current inflation. Therefore, we anticipate that if the December CPI does not exceed 2% m/m, corresponding to inflation slowdown to 46.7% y/y, the CBT will commence easing. Our expectation is reinforced also by recent remarks from CBT Governor Fatih Karahan during the Inflation Report meeting, where he stated that initiating an interest rate cut cycle would not compromise the disinflation process or the transition to the lira. Therefore, we think a policy rate corresponding to a positive real interest rate would signal, from the CBT's recent perspective, a persistently tight monetary stance. This, in turn, could be interpreted as creating strategic latitude for potential rate reductions, aligning with a forward-looking assessment of macroeconomic conditions, in our opinion.

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Conversely, we question whether this is the most appropriate juncture to initiate monetary easing. Several factors contribute to our reservations. First, as of Mar 22, when the CBT raised its policy rate to its current level, the basket exchange rate was equal to TRY 33.3 while it currently hovers around TRY 35.5, reflecting a 6.6% increase. During the same period, the CPI and PPI increases remained well above that rate, at 21.5% and 14.0% respectively, indicating that inflationary pressures are still strong and outpacing currency depreciation. Therefore, we believe that an early easing of monetary policy under these conditions could further weaken the currency and reignite inflationary pressures.

Secondly, despite the downward trend, neither the real sector nor households, nor market participants believe that inflation will align with the CBT's forecast for end-2025, which is in the range of 21%. This significant disparity between the CBT's projections and the expectations of economic agents could, in our assessment, undermine the credibility of the CBT's policy framework. Such a credibility gap, in our view, may lead to unanchored inflation expectations, making it more challenging to achieve the desired disinflation trajectory.

Thirdly, we think premature monetary easing could risk reversing the progress made in stabilising the economy. With inflationary pressures still prevalent and expectations unanchored, reducing interest rates may exacerbate macroeconomic imbalances, in our view. It could also negatively affect the country's risk premium, potentially leading to capital outflows and increased volatility in financial markets, we think.

Additionally, the anticipated decline in inflation during 2025 is expected to be limited due to diminishing base effects, making 2025 a much more challenging year compared to 2024, in our assessment. We think this scenario underscores the importance for the CBT to manage expectations in a professional and transparent manner. Therefore, front-loaded interest rate cuts might lead to a premature loosening of monetary conditions, which, in our view, could exacerbate inflationary pressures and undermine the disinflation process.

The summary of the MPC's Nov 21 meeting is due to be published on Nov 28.

MPC rate decision in November

Quarterly Inflation Report for Q3

Monetary policy strategy for 2024

• Next meeting: Dec 17
• Current policy rate: 5.25%
• EMW forecast: 5.00%

The BCCh's Monetary Policy Council cut its benchmark interest rate by 25bps in the last two policy sittings, and we expect a repeat in the final meeting of the year, scheduled for Dec 17. The monetary policy environment is not much different than it was coming into the last meeting. The real economy still needs interest rates to keep declining. GDP growth is soft and slightly below potential on the aggregate, lending activity is on its worst cycle since 2009 and doesn't show signs of an impending rebound, and the labor market struggles in a context of high unemployment, rising labor costs, and expensive working capital financing.

What could prevent a cut is that inflation is above the 3.0% target and set to rise a little more over the next 3-5 months, and there is a latent risk of an inflationary shock from external developments that could leave the MPC offside if it keeps cutting its rate. The upcoming increase in inflation is led by a three-step adjustment to electricity tariffs that is largely seen as having only a transitory impact on inflation. However, the MPC worries that there could be second round effects, or that an external shock that hits commodities or the exchange rate could end up pushing inflation significantly higher, potentially de-anchoring expectations.

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Economic Activity

The main news since the MPC's last meeting is that the economic activity reading for September was very disappointing compared to expectations, with a contraction of 0.8% m/m and activity levels that were flat y/y. The BCCh had a 2.5% GDP growth forecast for 2024 that is now fairly unlikely to be met, and its negative output gap estimate is likely to get at least marginally wider. The real economy's soft performance puts pressure on the MPC to keep cutting to take the rate to neutral.

Lending activity is the second big factor that suggests the MPR cuts need to keep going. Bank lending has been consistently declining for three years in a row, and this decline is explained by shorter corporate and consumer loans (mortgage lending keeps rising). The inflation-adjusted stock of bank loans is at 2019 levels and going down. For context, the BCCh's poll data suggests the weakness of lending is tied more to demand weakness than supply-side conditions. The Chilean financial sector also went through a process to raise capital levels to adapt to Basel III standards and repaid liquidity facilities from Covid. The BCCh assured these processes would have no discernible impact on lending activity, but we believe it's fair to question the monetary authority's view given lending activity keeps sinking and interest rates decline slowly.

The impact of the labor market on monetary policy isn't clear, as it doesn't seem the MPC itself has a good grasp of what is going on amid all the noise. Unemployment is unequivocally high by Chile's standards, stuck at 8.5%-8.7% for the last two years, and having taken a step up from 2022. Despite this, hourly real wages have been growing 2.5% y/y in those two years. The implications for monetary policy are not clear because there are a lot of potential sources of structural change (strong immigration, Covid, and an ongoing process to reduce the standard workweek), and real wages also rise from a legislative big minimum wage hike.

Inflation

CPI inflation has been behaving a bit better than the central bank expected. Headline inflation of 4.0% is above the 3.0% target, but is pushed up by an overdue electricity adjustment that ends early next year and some backward looking elements (school fees). Expected inflation two-years out is well anchored at 3.0%. If it were for domestic inflation drivers only, the MPC would not be all that concerned about the inflation process now that we have some initial evidence that the power price revisions should not have big second-round effects.

The issue is that inflation should rise as high as 5.0% shortly, and even if the increase is tied to wholly-transitory elements, the balance of risks gets tilted at those levels. The threat of an upward inflationary shock at those inflation levels would bring questions of whether the MPC needs to reverse course on rates, which is something that council members believe erodes the credibility of monetary policy and the potency of their tools.

External developments

Donald Trump winning the US election could add to inflation in the near term by weakening the Chilean peso. However, the threat of weaker global trade and slower growth in China would in turn reduce Chilean growth prospects, putting downward pressure on inflation. The volatility generated by the uncertainty surrounding Trump's plans should also make the MPC more conservative about cuts.

Geopolitical conflicts in the Middle East and Eastern Europe also put the MPC on higher alert, as the probability of inflation or interest rate shocks goes up.

Overall

We expect the MPC to cut 25bps in December. The story would change if external developments add to inflation or lead to a significant REER depreciation, or if economic activity data for October is good enough to compensate for the September disappointment (holiday effects were very heavy in September, so we believe a big positive surprise in the October activity reading is a possibility). Even if the MPC wants to lean a little conservative due to the uncertainty generated by external developments, we believe there is room for at least one more 25bps cut before a pause.

• Next MPC meeting: Dec 20
• Current policy rate: 9.75%
• EmergingMarketWatch forecast: 50bps cut

The majority of BanRep's monetary policy board considers it important to keep a prudent MPR easing cycle given new fiscal risks and potential for exchange rate depreciation, as reflected in the October meeting minutes. Board members noted several emerging risks, such as the decline in international oil prices, budget financing concerns for 2025, and uncertainties related to the SGP reform. These factors have been driving up risk premiums and could potentially add inflationary pressures, according to the board. In this context, four members voted to continue the 50bps rate cuts. Unless these uncertainties are resolved, we expect these members to support a similar stance in the last meeting of the year.

Another key issue in December will be the debate over the minimum wage hike. As in previous years, the government will engage with business leaders and unions to negotiate the increase. However, a consensus appears unlikely. If no agreement is reached, as has happened in recent years, the government will make the final decision. FinMin Ricardo Bonilla has already suggested that the wage increase should be 1pps above the inflation rate, forecasting a 6.2% increase based also on productivity rates. While business leaders have not disclosed their preferred rate, we expect their proposal to be significantly lower. This decision holds added weight this year, as the labor reform under discussion in Congress could, if passed, impact business costs, productivity, and job creation.

On the other side, three board members have been inclined to accelerate the pace of cuts since several meetings ago. FinMin Ricardo Bonilla supports President Petro's position on accelerating rate cuts to stimulate economic growth. Following the October CPI inflation report, which saw inflation declining more than expected, there is potential for sharper MPR cuts. If inflation continues on its disinflationary path in November, the board could opt for a 75bps cut while keeping a contractionary stance. However, this report alone has not had a significant impact on the more hawkish members.

Overall, the outlook for the next meeting, scheduled for the end of December, remains uncertain. While there is hope that the board might accelerate rate cuts given the ongoing disinflation process, the board has maintained a hawkish stance, prioritizing the containment of inflationary risks over economic stimulation, contrary to the government's preference. Key factors, including the fiscal outlook, exchange rate developments, and the minimum wage decision, will need to unfold before a clearer direction can be determined.

• Current policy rate: 4.50%
• Next monetary policy meeting: Jan 6, 2025
• Expected decision: Hold

The MPC has been keeping the policy rate steady at 4.50% in the past several meetings citing the elevated inflation environment and the increased geopolitical uncertainties as factors backing its decision. The BoI did not change the rhetoric either and continued to stress on the need to first look at the stability of the financial markets and to make efforts to reduce risks along with pulling inflation down to the 1-3% target range and supporting economic activity. BoI governor Amir Yaron has stated before that the monetary policy was still restrictive enough to bring inflation back to the target but as of October, he started mentioning a possibility to increase the rate while previously the MPC was choosing between maintaining the rate and making a cut, possibly as of Q2 2025. The likelihood for a hike is not to be neglected in the following months as risks for inflation have not disappeared and it is to increase, also because of a VAT rate hike. The risks for a looser fiscal stance in 2025 have not dissipated yet either. We note that the BoI research department no longer expects rate cuts until October 2025 and assumes that the policy rate will remain at 4.50% as it would take longer for the increased inflation to return to the target. We recall that this is not a guidance or a projection of the MPC but has most likely been endorsed by the policy makers.

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Inflation has been accelerating since March until August but then moderated to lower-than-expected 3.5% y/y in September, in a positive surprise to the markets, and then stabilised at that level in October, in line with expectations. The latest inflation expectations, one of the major considerations the MPC is considering in the decisions, pointed to some moderation. Thus, inflation developments seem to have stabilised for now but inflation has been above the 1-3% target range in the past four months. After the rate decision in October, deputy governor Abir stated that the inflation environment has become more challenging since end-August and the inflation spike was due to supply disruptions in tourism, construction and agriculture, which are not expected to start performing better in the near future, we think. The latest central bank forecast sees inflation accelerating further in early 2025 with possible moderation towards the target in H2 2025. Inflation is not likely to return to the target before Q4 2025, however, as the inflation forecast is seen at 3.2% y/y in October 2025, according to the BoI. The BoI said that the inflation forecast tends to the upside and is affected by supply limitations, which are also affecting economic activity. It continued repeating that the war and its impact on activity, the shekel depreciation, prolonged supply limitations, fiscal developments, and higher global oil prices are pro-inflationary risks.

Economic activity rebounded by above-expected 3.8% saar in Q3 but still fails to reach pre-war levels due to investment and exports. The distance to the trend is largely due to supply limitations, which have been affecting several industries, of which construction was hardest hit. However, private consumption is strong and exceeded pre-war levels already in Q2 so the MPC would risk pumping up inflation if it decides to soften the monetary policy stance, we think. The BoI revised down GDP growth projections by 1pp and 0.4pps to 0.5% in 2024 and 3.8% in 2025 and said that GDP would remain below the pre-war trend in the medium term. It said in the November rate decision that the high-frequency indicators reveal mixed signals for Q4. The fiscal policy still remains expansionary but the government has indicated that it would try to be more conservative in 2025, which is seen in the scope of the package of proposed austerity measures but it remains unclear if the entire package will pass in the Knesset. The reached ceasefire with Hezbollah in the north should contribute to reducing geopolitical risks and what is more, the US announced it would make another push for reaching truce between Israel and Hamas. Thus, we see the risks overall balanced pointing to no change in the monetary stance for now.

Board statements, press briefings, minutes from MPC meetings

Calendar of MPC meetings

Latest BoI macroeconomic forecasts

Monetary policy reports

Bank of Israel Law

The Monetary Committee

• Current policy rate: 14.25%
• Next monetary policy meeting: Nov 29
• Expected decision: hold

We still expect the NBK to opt for an on-hold decision at the Nov 29 rate-setting meeting. We remind that the most recent CPI data suggests inflationary tendencies as inflation rose to 8.5% y/y (from 8.3% y/y), while the monthly price growth rate was above the historical average at 0.9%. At the same time, households' inflation expectations were significantly more moderate in October at 12.5% (from 14.1%), which the central bank attributed to a stabilisation of the exchange rate. This is strange as the tenge depreciated in the data collection period, but assuming the exchange rate dynamics were somehow decisive, there are negative implications for the near term due to stronger pressure on the national currency.

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The tenge's weakening is an inflationary factor, which the NBK noted in its announcement that the requirement for obligatory FX sales will be reinstated. In addition, NBK governor Suleimenov's most recent statement expressed concern that the CPI rate is still far from the 5% medium-term target. He insisted the latter is a priority, rejecting the idea of a double mandate that would also require support for economic growth by the bank. Suleimenov reiterated criticism of fiscal stimuli and their expansion, which have been identified as an obstacle to monetary easing.

Overall, the NBK has signalled it does not see an alternative to its tight stance at present. This also matches previous indications that the base rate would be left on hold until the end of 2024. It would be a surprise if the bank decides to deliver a rate cut in the current circumstances, though there is a general task to renew the easing cycle as soon as possible. The next rate-setting meeting will be in January, but we do not think the prospect of an immediate rate cut is certain at this point.

• Next policy meeting: Nov 28
• Current policy stance: 3.25%
• Our forecast: Hold
• Last decision: Cut by 25bps (Oct 11)
• Rationale: Won's sharp weakening versus the dollar to trump other consideration

The Bank of Korea will likely stay on hold in its last meeting for the year on Nov 29 as it takes a wait-and-see approach regarding the future direction of the USD/KRW exchange rate and the policies that will be implemented by the new Trump administration. The Korean won has depreciated against the dollar following the election of Donald Trump as the next US president, breaching the psychological KRW 1,400 per dollar level on Nov 12. To remind, authorities have verbally intervened multiple times in the past when the exchange rate approached the 1,400 level. That said, there have been no verbal interventions from BOK so far in the aftermath of Trump's victory and the government likely wants to wait and see whether this weakening is a temporary phenomenon or a new secular trend.

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The issue with won's depreciation will likely trump other considerations such as the fall of inflation below the 2% target, the successful reduction in household lending growth in October, and the weakening of economic momentum. Earlier this year, the primary concern for the central bank was definitely inflation due to the surge in fresh food prices in early 2024, however, the central bank eventually turned its attention to the sharpening of household lending growth in August which threatened to disrupt financial stability and exacerbate speculation in the real estate market.

The issues of household lending growth and inflation have been mostly subdued as inflation hit a new low of 1.3% y/y in October, while household lending increased by just KRW 3.9tn m/m in October as financial authorities tightened lending criteria for mortgage loans in September. However, the FX market pressures have re-emerged following Trump's victory as markets are now expecting higher interest rates and growth in the US. In our view, BOK will be hard-pressed to delay additional rate cuts at least until the Fed moves to lower rates again as the interest differential with the Fed funds rate remains substantial at -1.5pps.

Trump likely to bring higher inflation, but impact on growth could be rather neutral

Going forward, we think that interest rates in Korea might stay higher for much longer, if the Federal Reserve delays further rate cuts. At the same time, the prospects for higher interest rates in the United States have improved due to the expectations that Trump will adopt pro-growth and pro-inflation policies such as deregulation, reducing immigration, implementing tariffs and doing more tax cuts. Thus, we see potential for higher rates in Korea as the BOK will have to deal with higher global inflation due to decline in trade volumes, while at the same time the stronger dollar will also put pressure on the BOK to defend the won.

As of now, we think that Trump is unlikely to impose universal tariffs on Korean imports as he threatened in his election campaign as he will likely narrow protectionist policies to certain sectors such as steel making. At the same time, he is likely to re-start his trade war with China which will reduce demand in China and affect Korean exports to China. On the other hand, Trump's presidency might also bring some benefits to Korean exports if he decides to impose tougher sanctions on Chinese memory chipmakers which are currently undercutting Korea's SK Hynix and Samsung Electronics. Overall, we think that it is way to early to predict Trump's policies and the net impact on growth could be rather neutral.

BOK likely to resume rate cuts in 2025 to aid growth

We still think that the BOK will do around 50-75bps rate cuts in 2025 in order to prop up domestic demand which has continued to slow down. At the same time, export growth remains robust and semiconductor exports in particular remain a bright spot, which is unlikely to change in the near future as investment into AI is expected to remain robust. Before the BOK resume rate cuts it will likely want to see stabilization of FX market pressure and gain more clarity on the impact for inflation and growth under Trump's administration. Overall, we don't see any immediate pressure on the BOK as the economy will likely slow down slightly in Q4, but the threat of deflation remains low. Thus, we think that a wait-and-see approach by the BOK is the most likely outcome until early 2025.#

Useful links

MPC meetings calendar 2024

MPC meetings calendar 2025

Minutes

Previous MPC decisions

MPC board members

• Next policy meeting: Jan. 22, 2025
• Current policy rate: 3.00%
• Our forecast: Hold
• Last decision: Hold (Nov. 6)
• Rationale: BNM sees inflation in 2025 to remain contained despite RON95 subsidy rationalization while growth is expected to maintain momentum

Bank Negara Malaysia on Nov. 6 maintained the overnight policy rate (OPR) at 3.0% in its final policy meeting of 2024, a decision that aligned with market expectations. Muted inflation and steady economic growth underpinned the decision, with the central bank reiterating that the current monetary policy stance continues to be supportive of the economy. The strengthening of the ringgit provided further support to maintain status quo on the key rate, which was last hiked by 25bps from 2.75% in May 2023.

Inflation environment

CPI inflation slowed to a five-month low of 1.8% y/y in September, suggesting that the government's fiscal consolidation efforts, such as diesel subsidy rationalization and a 2pps hike in services tax in March, did not spillover to broader prices. During Jan-Sep, inflation averaged 1.8% y/y, which is reportedly below its 10-year average of 2.0% as well as less than the BNM's initial forecast of 2.0%-3.5% for this year. Lower global crude oil prices and ringgit appreciation kept the cost of imports contained.

The central bank sees inflation to remain manageable in 2025, supported by easing global cost conditions and the absence of excessive domestic demand pressures. However, the removal of blanket subsidies for widely used RON95 gasoline and sales and services tax (SST) expansion pose upside risks to the outlook. The pressure from floating of RON95 price may be limited if 85% of the population is shielded from it, as pledged by PM Anwar Ibrahim. Last month, the government forecast inflation to accelerate to 2.0%-3.5% next year, from a downwardly revised 1.5%-2.5% in 2024.

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GDP growth

A pick up in economic activity on the back of resilient domestic expenditure and rebound in exports has allowed the BNM to take a step back from providing additional stimulus in the form of rate cuts. The economy is expected to have expanded at a solid but slower pace of 5.3% y/y in Q3, with strong growth seen across the sectors barring the mining sector.

GDP growth clocked in at 5.1% y/y in the first three quarters of 2024, leading the government to upgrade its full-year growth forecast to 4.8%-5.3%, from the initial target of 4.0%-5.0%, largely due to better-than-expected activity in agriculture and construction sectors. For 2025, growth was expected to remain solid at 4.5%-5.5%. The BNM projects exports to remain strong on account of the global tech upcycle, which along with robust tourism and healthy household spending amid favourable employment conditions would keep the growth momentum intact in 2025.

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Exchange rate stability

The ringgit has come under pressure following the U.S. presidential election. The USD/MYR has inched up by 2.6% since Nov. 5 to over three-month low as of Nov. 13. Before the polls, it had gained 8.9% against the U.S. dollar since February, when the local currency fell to its lowest since the 1997 Asian Financial Crisis. The BNM in its latest monetary policy statement said that the outcome of the U.S. elections could heighten volatility in the near term but expressed optimism that the narrowing interest rate differentials with the advanced economies, Malaysia's favourable economic prospects and domestic structural reforms are positive for the ringgit.

The central bank had previously ruled out adjusting its policy rate to prop up the currency. It has not given any clear signal that it would intervene this time around. However, BNM governor Abdul Rasheed Ghaffour last week said that the central bank stands ready to manage any spillover from global developments to domestic markets, including by ensuring sufficient liquidity in the domestic foreign exchange market.

Conclusion

All in all, we expect BNM to stand pat on the OPR in the near- to medium-term - a projection which is in line with the consensus forecast. A group of economists polled by Reuters predicted the central bank to leave the benchmark interest rate unchanged at least through 2025, citing steady inflation and strong GDP growth. Nevertheless, the BNM would remain vigilant for any buildup in inflationary pressures mainly due to RON95 subsidy rationalization and thus, a policy rate hike cannot be entirely ruled out.

• Next MPC meeting: Jan 15, 2025
• Current policy rate: 6.50%
• EmergingMarketWatch forecast: Hold

Rationale: We think that the NBR will not consider cutting the key rate sooner than April 2025. Easing through rate cuts will probably be back on the central bank's agenda after assessing several factors at end-Q1 2025. These include expected government measures to reduce the fiscal deficit, the effects of a higher-than-projected food inflation caused by bad weather conditions in 2024, and the expiration of the energy price cap schemes in March 2025. In addition, the NBR recently revised upwards its 2024 and 2025 inflation forecasts. It explained that the CPI growth will pick up at the end of 2024 and fluctuate at the beginning of 2025, before re-entering a consolidated moderation trend, on a higher path than previously projected.

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The next MPC meeting is on Jan 15, 2025, and we believe the rate will remain at 6.50%, keeping real rates in the positive territory for longer and a tight monetary policy, to counterbalance a very relaxed fiscal policy. We ground our assumption on a persistent double-digit service inflation, a considerably wide fiscal gap, and higher-than-expected inflationary pressure in the food sector due to bad weather. We also consider robust wage rises and the potential upward trend of oil prices due to conflict intensification in the Middle East. Further on, the government measures to contain inflation, like price caps in the energy market and markup caps on several basic foods, expire at end-March and at the beginning of next year, respectively. There are no signals that they might be extended. Besides, a board member once said that the central bank was pausing key rate cuts in the context of challenging fiscal consolidation.

The October inflation release confirmed the new NBR inflation outlook, namely a marginal speeding, mainly driven by resilient demand in non-food, higher-than-expected food inflation and sticky double-digit service inflation, amid robust wage rises. These developments come on top of a risky setting, with a quite relaxed fiscal policy, very high government deficit, large spending in election year and consumer lending acceleration despite high rates. Therefore, we believe a more prudent approach would be suitable, favouring a policy rate hold decision for now. In fact, NBR Governor Mugur Isarescu several times stressed on the effects on inflation and CA deficit of a worryingly high fiscal gap and wage increases that are not correlated with productivity.

On the external front, markets turmoil and increased geopolitical tension in the Middle East and Ukraine mirror low predictability in financial markets and high risks of other disruptions in commodity markets. Moreover, the NBR often stressed that it also considered policy decisions of the central banks in the region, Fed and ECB.

To remind, the NBR cut the policy rate twice this year, in July and August, but that was not a start of the monetary easing cycle. The central bank took the opportunity of the inflation moderation trend, which signalled consolidation. Yet, several risks to the inflation outlook have materialized, like intensification of geopolitical tension, a stronger deficit widening and bad weather conditions that kept the food inflation high.

• Сurrent policy rate: 21.0%
• Next monetary policy committee meeting: Dec 20
• Expected decision: 100bp hike

The CBR surprised the market with a 200bp rate hike on Friday, raising the key rate to 21%, which is the highest level since the adoption of the inflation targeting framework. The consensus (and we) expected a smaller hike of 100bps, though several more hawkish local economists forecasted a bigger raise. The key arguments remained unchanged: sticky inflation, rising inflation expectations and tight labour market. The CBR also linked the decision to raise the rate to the announced additional fiscal expenditures this year, though we do not think these were really a surprise for the monetary authorities.

The key takeaway from Friday's decision and the following press conference is the considerably more hawkish CBR rhetoric. The CBR said that current inflation would require a tighter monetary stance, adding that there is no upper limit to the key rate and if inflation remains at the current level it would result in more hikes. According to the new CBR forecast, the key rate will average 21-21.3% until the end of the year. That implies that the CBR may raise the key rate by up to 250bps at the last MPC meeting for this year on Dec 20. The CBR also said that it "allows for a rate hike at the next MPC meeting". Previously, the CBR used this specific phrase in its press releases nine times and in all cases it went for a hike at the next MPC meeting.

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Apart from the key rate, the CBR made other changes to its mid-term outlook. We believe the most important ones are the inflation forecast for 2024-2025 and the key rate forecast for 2025. Regarding inflation, the CBR now expects it to decline only to 8-8.5% this year, which is easily achievable, given the high base of the previous year. The CBR also expects inflation to decline to 4.5-5% next year, thus discarding its previous commitment to bring inflation back to the target level of 4% in 2025. Both these are somewhat dovish signals: the CBR does not set an ambitious target anymore, which gives it opportunities to hike key rates less aggressively. The CBR also raised the forecast for the average key rate for 2025 to 17-20%, meaning there is little chance for a swift easing cycle.

The projected 17-20% average key rate along with 6.1-6.8% average inflation in 2025 implies that the CBR plans to stay above the 10% real policy rate through the next year. While the CBR pictures the draft budget as an unexpected pro-inflationary factor due to a bigger-than-usual utility tariff indexation next year, we pay more attention to the lower budget deficit and lower social expenditures, which would contribute to weaker demand. We also note that latest macro releases point at the economy cooling down, so we can expect GDP growth to fall next year.

While the CBR reserved the possibility for a larger hike in December, we expect it to limit the move to a modest 100bp raise. We doubt inflation would accelerate considerably in the remaining part of the year on additional fiscal expenditures, as these are mainly linked to the defense sector and debt service. We see inflation closer to the lower end of CBR's 8-8.5% forecast range for this year, meaning that no drastic measures will be required.

• Next MPC meeting: Nov 21, 2024
• Current policy rate: 8.00%
• EmergingMarketWatch forecast: 7.75%

The most recent developments on the CPI and currency front continue to support our expectations for a 25bps rate cut at the last MPC meeting for this year set for Nov 21. The rate cut will come on the heels of the 25bps reduction in September and will bring the main policy rate to 7.75%. It seems likely that the central bank will continue to have space for some more easing in 2025 and the main policy rate could reach 7.0% by the middle of next year, in our view. This is mostly supported by the still restrictive policy stance and the anchoring of inflation on the policy horizon at the preferred 4.5% rate.

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The latest data from StatisticsSA shows that consumer price inflation eased to 3.8% y/y in September from 4.4% y/y in the preceding month, mostly on account of fuel price reduction and a large base effect from last year. We expect further moderation to occur in October, largely reflecting the same developments. CPI averaged 4.3% y/y in Q3 and is expected to slow further to 3.8% y/y in the final quarter. This leaves sufficient space for the MPC to implement another rate cut in November which is also seen as the base-case scenario by markets. Inflation is expected to start accelerating somewhat in the second half of next year as some base effects begin to disappear. However, inflation remains largely in line with the target of the central bank over the monetary policy horizon which should enable further rate cuts next year.

The central bank confirmed the easing of the inflation outlook in the Monetary Policy Review (MPR) which was released earlier in October. It said inflation moderated substantially over the review period and the central bank's forecasts have consistently been revised for the better. However, the central bank also noted that the disinflation occurs mostly on the back of strong fuel deflation and markedly lower food inflation. It pointed out that after the September interest rate cut, the policy stance remains moderately restrictive with the real repo rate gap averaging 1.6% this year.

Earlier in October, the central bank governor Lesetja Kganyago argued in favour of the adoption of a lower inflation target in line with South Africa's peers. This is a long-standing position of the central bank which is also in talks with the National Treasury which is the other stakeholder in the setting of South Africa's inflation target. The current official target is a range of 3.0-6.0% but in 2017 the central bank started indicating the middle of the range 4.5% as the preferred rate. This has had an instrumental impact on the moderation of previously persistently high inflation expectations. The current-year inflation expectations declined to 5.1% on average in the third quarter and are expected to edge lower in Q4 (release by BER on Dec 12).

In his Medium-Term Budget Policy Statement (MTBPS) on Oct 30, finance minister Enoch Godongwana stated that anchoring inflation expectations is important for South Africa's macroeconomic policy framework, and this is what the Reserve Bank is responsible for. He said that the two institutions continue to work on assessing the suitability of monetary policy targets, and to improve the levers of macroeconomic policy coordination, which seems like a reference to a potential agreement on the issue of lowering the inflation target.

Overall, over the course of the next three quarters the inflation trajectory should remain supportive of further easing the monetary policy stance. The stabilisation of the political backdrop is largely favourable for the rand which in turn contributes to lowering the premium on government debt and makes government debt more attractive. Howerver, the external environment remains a source of uncertainty and risk, including the situation in the Middle East, the elections in the US and the performance of the Chinese economy.

• Next Policy Meeting: TBD (Q1 2025)
• Overnight Policy Rate (OPR): 8.0%
• Standing Deposit Facility Rate (SDFR): 7.5%
• Standing Lending Facility Rate (SLFR): 8.5%
• Previous Decision: New OPR set at 8% (Nov 27)
• Our Forecast: Hold
• Rationale: The Central Bank of Sri Lanka (CBSL) will allow for the latest change in monetary policy and further easing to trickle into the economy before slashing rates further.

Policy Overview

The Central Bank of Sri Lanka (CBSL) implemented today a significant shift in its monetary policy framework, introducing a single policy interest rate mechanism effective November 27. The newly established Overnight Policy Rate (OPR), set at 8.00%, will replace the dual rate system and serve as the central monetary policy tool, signalling a further easing of the Bank's policy stance. This adjustment translates to an approximate 50-basis-point reduction from the current Average Weighted Call Money Rate (AWCMR).

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Under the revamped framework, the OPR will be periodically revised to reflect the CBSL's monetary policy direction. The Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR), which provide the bounds for overnight interbank transactions, will now be tied to the OPR with a margin of ±50 basis points, setting these rates at 7.50% and 8.50%, respectively.

In line with our expectations, the CBSL decided to further ease the monetary policy. This comes on the back of persistent deflation experienced over September and October. Further, with the economy looking to increase activity, CBSL would want to drive the momentum by providing credit. Driving economic activity is therefore the primary objective for CBSL in the near term.

Inflation Trends

Inflation dynamics in Sri Lanka have shifted significantly. After a year of effective inflation control, the CBSL is prioritising economic growth. The Colombo Consumer Price Index (CCPI) recorded a y/y decline of 0.8% in October, reflecting deflation. Key contributors to this trend include falling fuel, electricity, and gas prices, with additional price reductions anticipated. Despite short-term deflation, inflation is expected to hover near the 5% target over the medium term. The decision to ease policy further comes amid deepening deflationary pressures and a favourable external outlook. Core inflation, which reflects underlying demand dynamics, has also softened.

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CBSL forecasts suggest that headline inflation will remain negative in the near term, impacted by continued declines in fuel and transport costs and easing food prices. However, inflation is expected to revert to positive territory by mid-2025 and converge toward the 5% target over the medium term, supported by calibrated policy measures. Core inflation is projected to stabilise after a temporary dip, while inflation expectations have shown signs of further moderation since the last review. Therefore, looking ahead, the CBSL is likely to wait and watch how the prices shift with the new rate cut. Additionally, the CBSL will be wary of the moves introduced by the incoming government. CBSL will also proceed cautiously following the government's budget in 2025. The government plans to announce 2025 budget on January 9.

Economic Growth

Sri Lanka's economic recovery remains on track, with real GDP growing 4.7% y/y in Q2 2024, slightly below Q1's 5% growth. This marks a full year of consistent growth after five quarters of contraction. In more detail, industrial sector growth surged by 10.9% y/y, driven by gains in utilities, chemicals, metals, and wood products. Agriculture grew 1.7% y/y, aided by seasonal factors. Meanwhile, construction expanded by a robust 11.9% but services slowed to 2.5% growth. However, tourism-related sectors such as insurance and accommodation saw notable gains.

Reforms under the IMF program, alongside stronger tourism activity, are supporting the recovery. The ongoing tourist season is expected to further benefit the services sector. Sri Lanka has received over 1.7mn tourists so far in 2024 (as of mid-November), indicating that the remaining period will also see substantial incoming of tourists. However, the disbursement of the next IMF tranche may face delays, with the government review currently ongoing.

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External Sector

Sri Lanka's external sector has shown mixed performance. The trade deficit widened in early 2024 due to increased imports. Meanwhile, tourism revenues surged as arrivals exceeded 1.7mn through November. Remittances also strengthened, improving the current account position, and the Sri Lankan Rupee has appreciated over 7% against the USD in 2024, with gross official reserves at $6.4bn in October.

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Debt restructuring progress has been significant, with recent agreements with bondholders marking a milestone toward stabilising national finances. Export recovery in H2 2024, supported by global trade improvements, is anticipated. However, risks such as geopolitical tensions and the U.S. elections may affect the timeline.

Outlook

With inflation subdued and growth steadily improving, the CBSL is expected to maintain its current supportive monetary stance following the latest rate cuts. Rather than further easing, the central bank is likely to hold rates steady at the next meeting to assess the impact of its recent measures. Key drivers of economic stability, including tourism, structural reforms, and IMF backing, remain crucial, although delays in fund disbursement and external uncertainties could dampen recovery momentum. With parliamentary elections now concluded, attention will turn to government policy initiatives, which the CBSL will closely monitor to gauge their influence on the broader economic trajectory.

Further reading

Last MPC decision

• Next MPC meeting: Dec18
• Current policy rate: 2.25%
• EmergingMarketWatch forecast: Hold
• Rationale: MPC statement of Oct 16; comments by BOT officials; shift in voting results

We expect that the BOT's Monetary Policy Committee (MPC) will hold the policy interest rate at its next meeting on Dec 18. On Wednesday, the MPC voted 5 to 2 to reduce the policy rate by 25bps to 2.25%. Two MPC members voted to keep the policy rate unchanged at 2.50%.

The cut was a surprise, as polls predicted a hold decision. According to the MPC, the policy rate should remain neutral and consistent with economic potential. Furthermore, it should not be at a too low level that would lead to the build-up of financial imbalances in the long term.

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The 25bp rate cut was justified with the need to ease debt-servicing burden for borrowers. The lower policy rate is not expected to impede debt deleveraging given the expected slowdown in loan growth. The rate will also remain neutral and consistent with economic potential.

The two votes for a hold decision were justified with a view that the original policy rate is consistent with the economic and inflation outlook, as well as an emphasis on long-term macro-financial stability. Another reason for favouring no change was the need to preserve policy space given ongoing uncertainties.

BOT Governor Sethaput Suthiwartnarueput and Assistant Governor Sakkapop Panyanukul told reporters that the Oct 16 cut was not the beginning of an easing cycle, but rather a recalibration.

The policy rate reduction came after five consecutive hold decisions, the last of which was made in August with a vote of 6 to 1 (one MPC member favoured a 25bp cut). The latest results mean that at least four MPC members have changed their vote. In our view, this large shift suggests that another 25bp cut in December cannot be ruled out.

GDP

The MPC forecasts GDP growth of 2.7% in 2024 and 2.9% in 2025. In June, the two rates were predicted at 2.6% and 3.0% respectively.

With regard to the latest projections, the main growth drivers include tourism, private consumption that is further benefiting from government stimulus measures, and improvement in exports given stronger demand for electronics. At the same time, the MPC said that the recovery has been uneven across sectors, with certain goods exports and manufacturing output, as well as SMEs facing structural impediments.

Inflation

The MPC forecasts headline inflation of at 0.5% in 2024 and 1.2% in 2025. Raw food inflation is likely to increase because of volatile weather conditions, whereas energy inflation is anticipated to rise due to a base effect. Core inflation is projected at 0.5% this year and 0.9% next year. It is anticipated to stay low partly because of structural factors, such as heightened competition from imported goods.

Medium-term inflation expectations remain in line with the target range of 1-3%. Headline inflation is expected to gradually return to the target band by end-2024.

Lending

Private sector funding costs through commercial banks and corporate bond markets stayed relatively stable. Overall loan growth decelerated, whereas credit quality deteriorated.

Total loan growth (excluding public sector) decelerated to 0.4% y/y at end-August. The data covers loans from commercial banks and subsidiaries, SFIs, and non-bank supervised by the BOT. The y/y decline in lending to SMEs widened to 3.3%. Positive annual growth decelerated for large corporate and retail loans, to 2.2% and 1.2%, respectively.

At end-August, the NPL ratio for total lending was 3.9%. The NPL ratios for SMEs, retail and large corporate loans were 9.1%, 4.0% and 1.2%, respectively.

The MPC supports the central bank's policy to facilitate debt restructuring through financial institutions. The committee considers the policy a targeted debt measure that helps the household debt deleveraging process.

In addition, the MPC emphasised the crucial importance of monitoring the effects of deteriorating credit quality on funding costs and overall credit growth, as well as their impact on real economic activities.

Exchange rate

The Thai baht is trading at USD/THB 33.215 as of the time of writing, which compares with USD/THB 34.35 on Dec 29, 2023. The Thai currency has appreciated from USD/THB 34.17 on Aug 21, the date of the preceding MPC meeting. The strengthening of the baht, along with the subdued economic growth prospects have been major arguments supporting the calls for cutting the interest rate. These calls came from both government officials and private sector representatives.

Further reading

MPC decision of Oct 16

Schedule of MPC meetings

Edited minutes of MPC meetings

Monetary policy report

• Current rate: 13%
• Next rate decision: Dec 12
• Expected rate decision: On hold

The board of the central bank (NBU) on Oct 31, as widely anticipated, announced keeping its key policy rate on hold at 13.0% again, from Nov 1. A year-long easing cycle is definitely over. The NBU stated that inflation, as expected, has been growing; what is more, the pace was faster than anticipated by the NBU. The headline CPI inflation reached 8.6% and core inflation reached 7.3% y/y in September. October inflation figures are to be reported on Nov 8. The NBU explained the high inflation by a relatively bad harvest, businesses' growing expenses, including on labour, and the hryvnya depreciation earlier this year. The NBU is going to publish the summary of the MPC discussion that preceded the latest rate decision on Nov 11.

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The NBU predicted more upward pressure on prices in the near future and disinflation only in spring 2025, which should come thanks to 'the NBU's prudent monetary policy and weaker external price pressures', as well as expected improvements in the energy sector and agriculture. The NBU also noted that the uncertainty about international aid inflow decreased, which should allow the government to keep filling the budget gap and enable the NBU to maintain the FX market sustainability. The NBU predicted that, as a result, inflation would fall to 6.9% by end-2025, from the 9.7% expected at end-2024, and return to the 5% target in 2026. That said, the unpredictable nature of Russia's war remains the main risk, the NBU noted.

The NBU said its key policy rate was likely to stay at 13% at least until summer 2025. What is more, it did not rule out some tightening. Meanwhile, IMF deputy mission chief Trevor Lessard also said in an interview published by Interfax-Ukraine on Nov 4 that the NBU should maintain the current policy or consider tightening.