• 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: Jul 29-30, 2025
• Current policy rate: 15.00%
• EmergingMarketWatch forecast: Hold

The BCB's Monetary Policy Committee (Copom) is expected to follow its previous guidance and pause at its next policy sitting on Tues.-Wed. the monetary tightening cycle that began in September 2024, holding the Selic rate at 15.00%. The cycle has so far totaled 450bps via seven consecutive hikes. Recent data showing a slowdown in both inflation and economic activity should support the BCB's view that the effects of past tightening will deepen in the coming quarters. Amid ongoing tariff tensions between the US and Brazil, uncertainty persists regarding the potential impact of a 50% import tariff imposed unilaterally by the US on Brazilian products. US President Donald Trump has threatened this for Aug 1, but much remains uncertain. We believe this will reinforce Copom's cautious approach and support a decision to keep the Selic rate unchanged.

As the Aug 1 deadline for the implementation of the US's 50% import tariff on Brazilian products nears, its potential effects remain unclear. On one hand, lower external demand could reduce economic activity and redirect exports to the domestic market, easing inflationary pressures. A potential rise in unemployment could further help contain inflation. On the other hand, FX devaluation and retaliatory measures could pressure the currency and push inflation higher. After a tight monetary cycle, we believe the Copom will hold the Selic rate amid the uncertainty, though it will reinforce its vigilant stance on the economy and the Copom is unlikely to rule out another hike if necessary.

In terms of the latest data, IPCA-15 inflation rose slightly to 5.30% y/y to mid-July in 12-month terms, which was marginally above consensus due to higher electricity and transportation costs. While the reading exceeded expectations, the deviation was minor and is unlikely to alter the committee's guidance, in our view. Additionally, a sharper-than-expected economic contraction in May should further justify a pause to allow time to assess the cumulative effects of the tightening cycle. The persistent de-anchored inflation is also likely to support the expected decision, although analysts polled by the BCB have started to revise downward their forecasts for 2026 inflation -- though it remains above the Copom's forecasts.

Overall, the BCB is likely to unanimously hold the Selic rate at its Jul 29-30 meeting for the first time since Sep 2024, when the current tightening cycle began, while maintaining a hawkish tone. Recent data indicate that the 450-bps of tightening is increasingly weighing on the economy, supporting the BCB's outlook. In addition, uncertainties stemming from the US tariff threats should prompt caution from the committee. Although the tightening cycle appears to have ended, an easing cycle still seems distant. We expect the Selic rate to remain at the current 15.00% at least through year-end, with an easing cycle likely to begin only in H1 2026, though the timing will depend on future data and how the tariff issue evolves. We also expect the BCB to maintain its hawkish stance on inflation and reinforce its vigilant posture, likely indicating that further hikes remain on the table if necessary, although such a signal would likely serve more to bolster its credibility than to signal an imminent increase, in our view.

• Next MPC meeting: Aug 7, 2025
• Current policy rate: 3.50%
• EmergingMarketWatch forecast: hold

Rationale: The CNB expectedly turned more hawkish at the MPC meeting in June, and the vote to keep the policy rate unchanged was unanimous. Yet, the CNB's tone did not take a dramatic turn, and the end of the monetary easing cycle was not announced. We never expected that to happen, given the present level of uncertainty, so there was no real surprise. Strong domestic inflation pressure was singled out as a factor influencing the decision, with no real change in listed risks to the inflation outlook. There was a brief note about additional uncertainty stemming from the situation in Ukraine and the Middle East, but it did not go further.

Despite the relatively modest shift in tone in the post-meeting message, we believe the remarks of CNB governor Ales Michl at the post-meeting press conference were more revealing. In a nutshell, he said that domestic inflation pressure had increased, and that core inflation would remain elevated in the horizon of the inflation forecast. We believe this means that as long as inflation pressure remains high, we can forget about any more rate cuts. Michl did not rule out another cut entirely, and said the CNB will react to any changes in the inflation outlook. Yet, the underlying comment here is that inflation will likely remain elevated for some time, given how the housing and labour markets have developed. Later on, he mentioned that he would like headline inflation to be slightly below 2%, to guarantee that the inflation target will be met in the long term. Jakub Seidler also remarked that inflation would likely ease in H2 2025, but he still anticipates strong pressure on core inflation through the labour market.

The debate at the MPC meeting in June was more informative, as it showed that divisions on the board are currently along a hawkish and less hawkish line. The less hawkish-minded members, among them Jan Frait, Karina Kubelkova, and Jan Prochazka, do not rule out another rate cut in 2025. However, their position is based entirely on the assumption of a sharp downturn in economic activity, as a result of global trade disruptions. If that doesn't materialise, and inflation doesn't ease, neither of them is willing to push for more rate cuts. Thus, our suspicions that the bar for the next rate cut has been raised appear to be accurate. Even if there may be board members who would see the neutral policy rate a bit lower than the current 3.50%, they will act only when inflation shows permanent deceleration, and particularly core inflation.

Speaking of inflation, it has continued to accelerate, reaching 2.9% y/y in June, and the outlook is not encouraging. Core inflation strengthened as well, reaching 3% y/y, and is now expected to remain elevated throughout the entire monetary policy horizon, according to a short update to the inflation forecast by CNB staff. Property prices have continued to rise, exerting additional pressure on headline inflation through imputed rent.

Thus, we remain confident that we will see another pause in the monetary easing cycle in August, even with a new staff forecast coming up, though it will likely be far less benign than before. While a stronger CZK will dampen any potential external inflation pressure, there is no easing of domestic price growth for now. The fact that core inflation has become the main inflation driver will deter the CNB from acting quickly, which is why we don't believe a rate cut will be seen soon. We still do not rule out a cut in Q4 2025 entirely, but it will be fully contingent on inflation developments. If there is no meaningful easing in core inflation by then, then any further rate cuts will likely take place in 2026. In any case, we doubt the policy rate will end 2025 at a level lower than 3.25%, even if inflation starts easing later this year.

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Further Reading:

CNB board statement from latest MPC meeting, Jun 25, 2025

Post-meeting press conference, Jun 25, 2025 (in Czech)

Q&A after the latest MPC meeting, Jun 25, 2025

Minutes from the latest MPC meeting, Jun 25, 2025

Monetary Policy Report, May 2025

Macroeconomic forecast, May 2025

Meeting with analysts, May 12, 2025

CNB board profile

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

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

• Next MPC meeting: August 28, 2025
• Current policy rate: 24.5%
• EmergingMarketWatch forecast: 22.5% - 23.5%

The next MPC meeting is on August 28, and we expect that the committee will resume the monetary easing cycle after holding rates unchanged in July. We expect a 100-200bps rate cut, depending on the inflation report for July due on Aug 10, and the global and regional environment. Despite the surge of portfolio inflows over the past year and a half, Egypt has managed to boost its resilience to external shocks and the latest two major external shocks - the US tariffs announced in early April and the 12-day war between Israel and Iran mid-June - had limited impact on the country. Further, the pound has been appreciating since early July, partly due to capital inflows and partly to US policy to weaken the US dollar, which will allow the CBE to cut the interest rates.

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Headline inflation is expected to remain contained during H2 2025 driven by the cumulative impact of monetary policy tightening and the favourable base effect. Consumer inflation is expected to moderate during 2026, albeit at a slower pace given the expected drag effect from the fiscal measures aimed at tightening the fiscal stance. As such, underlying inflation is expected to converge to its historical average over the medium term, while the MPC says that inflation expectations have improved recently. GDP growth recovered in 2024/25, as the FX shortages were eliminated, manufacturing rebounded, FDI inflows picked up, and tourism inflows remain resilient. The MPC said that GDP growth should reach its full potential by mid-2026.

Monetary Policy Committee Statement

Monetary Policy Review

• Next MPC meeting: Aug 26, 2025
• Current policy rate: 6.50%
• EmergingMarketWatch forecast: Hold
• Rationale: MPC highlights that there are no reasons to change monetary policy guidance

The MPC is likely to continue its no-change policy on the next meeting in August and this stance is likely to be maintained in the longer term as well. The MPC last kept the policy rate unchanged at 6.50% on its meeting in July and also maintained the overnight interest rate corridor at 1pp around the policy rate. The decision was unanimously expected as it fit the policy guidance for a prolonged hold on the policy rate. According to the updated NBH forecasts, inflation will remain above the 4.0% upper band of the tolerance range around the 3.0% mid-term inflation target and will start slowing as of early 2026. The mid-term objective was expected to be achieved in the beginning of 2027. Recent inflation developments were in line with these expectations, the NBH has indicated.

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The MPC continued to highlight its prioritisation of the price stability objective over any stimuli for economic growth, according to its statement after the July meeting. It repeated the main elements of its policy guidance and NBH governor Mihaly Varga specifically emphasised that the policy guidance was unchanged from the earlier months. Monetary policy will continue to be based on a cautious and patient approach, in our opinion implying the lack of prospects for quick changes in the policy stance. Tight monetary conditions have to be maintained because of uncertainty and inflationary risks related to the geopolitical and global trade conflicts, it said. Ensuring positive real interest rates remained an explicit feature of the monetary policy stance and the MPC continued to highlight that a positive real rate was necessary in order to manage inflation expectations. Consumer inflation expectations have eased recently but remained elevated and their level was not in line with the price stability objective, Varga highlighted after the meeting.

The MPC approved a surprise cut in the reserve requirement ratio on its meeting in July. The ratio was cut by 2pps to 8% as of Aug 1, while the non-interest bearing share of the required reserves was left at 2.5% of the reserve base. The loosening of the reserve ratio followed the gradual decline of the excess liquidity of the banking system in H1 and will ensure that liquidity developments are neutral towards the monetary transmission, the MPC highlighted. The reduction of the reserve ratio therefore does not mean a change in the continued tight stance of monetary policy, it stressed. Varga also underlined that the adjustment of the required reserve ratio should not be considered a change in the monetary policy stance and explained that it was meant to counter the tightening of liquidity from the expiration of the five-year collateralised loans that were disbursed as support for the banking sector during the coronavirus epidemic.

The government recently initiated a restructuring of the MPC with a new amendment to the central bank law. The amendment raised the number of NBH deputy governors from three to four and expanded the MPC with two additional slots so that the maximum size of the MPC was increased from nine to eleven members. The MPC expansion was set to accommodate the higher number of deputy governors and to preserve the balance of voting power between the NBH management and the MPC external members, which are appointed by the parliament. Following the amendment, the parliament endorsed well-known economist Daniel Palotai to become the fourth deputy governor and Jozsef Dancso - the final MPC member from the parliament's quota. Dancso already stepped in his post and was present on the MPC's June meeting. Palotai last worked as Hungary's representative at the IMF and has long background in the NBH, including holding the chief economist post in 2013-2020. Palotai echoed the main MPC messages during his hearing at the parliament so we expect him to endorse the current policy stance and to work in close consensus with Varga. On the other hand, we think Dancso does not stand out with significant monetary policy qualifications and career achievements and seemed to deserve the post mainly through his loyalty to the ruling Fidesz party. Accordingly, we do not rule out that Dancso might adopt more dovish voting pattern, but in general, we think the MPC composition still does not imply that government pressure could push monetary policy into an excessively loose direction.

Post-meeting MPC statement from July rate-setting meeting

Background presentation of NBH governor Varga after July rate-setting meeting

Minutes from June MPC rate meeting

Inflation Report - Q2/2025

MPC meeting calendar 2025

• Next Policy Meeting: August 6-8
• Current Policy Rate: 5.50%
• Last Decision: 50bps cut (June 6, 2025)
• Our Forecast: Hold
• Rationale: After a cumulative 100bps easing since February, the RBI is expected to pause in August as inflation undershoots targets, liquidity turns surplus, and macro fundamentals remain solid - but global and trade risks persist.
  

At its June meeting, the Reserve Bank of India's Monetary Policy Committee (MPC) delivered a deeper-than-expected 50bps rate cut, bringing the repo rate to 5.50%. The SDF and MSF were adjusted to 5.25% and 5.75%, respectively. The MPC also shifted its stance from 'accommodative' to 'neutral,' signalling that while growth support remains on the agenda, future easing will be more measured. This followed a cumulative 100bps reduction over three meetings, underscoring the RBI's proactive effort to revive growth amid benign inflation and rising global uncertainties.

Inflation Outlook

The disinflationary trend has strengthened. CPI inflation eased to 2.1% in June, down from 2.82% in May, marking the lowest level since January 2019. Food inflation turned negative for the first time in over five years, with rural and urban food prices falling by 0.92% and 1.22%, respectively. This trend was driven by declining prices in vegetables, pulses, cereals, milk, and spices, aided by a strong monsoon and high agricultural output. The RBI's inflation forecast for FY26 remains at 3.7%. However Q1 inflation was below target at 2.7% (RBI estimate was 2.9%). The forecast for Q2 is 3.4%, Q3 at 3.9%, and Q4 at 4.4%. However, services and manufacturing cost pressures remain sticky - education, healthcare, and transport inflation edged up in June.

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Growth Momentum

India's Q4 FY25 GDP growth came in at 7.4% y/y, bringing FY25 full-year growth to 6.5%, in line with RBI and NSO projections. Key growth drivers included construction (10.8%), public services (8.7%), agriculture (5.4%), private consumption (6%), and investment (9.4%).

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The composite PMI for June remained elevated at 59.3, with the services PMI at 58.8 and manufacturing PMI at 57.6, showing strong expansion. However, industrial output growth slowed to 2.7% in April, the lowest in eight months, indicating a patchy recovery across sectors. On the other hand, agriculture is expected to have a spectacular year given the early arrival of the southwest monsoon and increased acreage this sowing season. Worth noting is that the recent income tax exemptions will also boost private consumption over the course of the year and provide buttress to the economic momentum. GST collections remained strong at INR 1.74tn in June, reflecting continued domestic demand.As a consequence, it is likely that the RBI would wait to assess the impact of the 100bps rate cut before cutting rates.

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External and Financial Conditions

India's external position remains comfortable. The current account posted a surplus of USD 13.5bn (1.3% of GDP) in Q4 FY25, and FX reserves stood at USD 699.7bn as of July 4, despite a weekly drop of USD 3.05bn. This still covers over 11 months of imports. Liquidity conditions have entered surplus mode, aided by the RBI's cumulative liquidity injection of INR 9.5tn since January and the phased 100bps CRR cut (to 3% by November). FX inflows and reduced currency leakage have also helped improve liquidity metrics.

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On the currency front, the INR/USD stands at 85.82, reflecting renewed pressure from a wider trade deficit (USD 23bn in June) and rising imports from China and the US. Heightened global tariff tensions and US reciprocal duties are key watchpoints.

Conclusion

Following 100bps of easing in the first half of 2025, the RBI is expected to pause in August, using the meeting as a strategic breather. Inflation is running well below target, real rates are neutral, and growth is healthy - but global fragmentation, sticky services inflation, and trade volatility warrant caution. Governor Malhotra's June comments that future actions would be "calibrated and data-driven" suggest the RBI is entering a wait-and-watch mode. We expect the central bank to hold through Q3, resuming action only if growth deteriorates or inflation slips further below the RBI's comfort band.

Further reading

Last MPC decision

Minutes of the Monetary Policy Committee Meeting

RBI Forward Looking Surveys

Calendar of MPC meetings

• Next policy meeting: Aug 19-20
• Current policy rate: 5.25%
• Our forecast: Hold
• Last decision: Cut, 25bps (Jul 15-16)
• Rationale: BI has started gradual monetary easing as GDP growth prospects deteriorate

Bank Indonesia cut the key rate by 25bps at its last MPC meeting on Jul 15-16, marking the third rate cut since the beginning of the year. The central bank justified the rate cut with the need to support GDP growth in a low-inflation environment, as the rupiah has stabilised against the dollar. Looking forward, Bank Indonesia said it would monitor the space for further rate cuts to stimulate GDP growth.

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So far, the central bank has cut the key rate by cumulative 75bps since the beginning of the year as it has become more and more dovish in light of the low inflation and economic growth slowdown. As a result, Bank Indonesia has cautiously progressed with monetary easing, which prompts us to expect one more rate cut by year-end.

Moreover, CPI inflation remains subdued and well below the midpoint of the central bank's 2.5+/-1% target band. Although it has started to rise, inflationary expectations remain firmly anchored to the central bank's target.

GDP growth

GDP growth slowed to 4.87% y/y in Q1 from 5.02% y/y in Q4 2024, marking the slowest expansion since Q3 2021. Since then, the BI has cut its GDP growth forecast, now expecting 4.6-5.4% economic growth, while most IFIs and rating agencies have their forecasts even lower at 4.7-4.9% in 2025.

In addition, the government also lowered its GDP growth forecast to 5.0% from 5.2% previously, though even this number now looks optimistic. Private consumption has been slowing down, dragging down overall GDP growth. On the bright side, export prospects have improved, particularly with the recent trade agreement with the US, which saw the US lower the import tariffs on Indonesian goods to 19%.

Exchange rate stability

The rupiah has strengthened since the beginning of May, erasing some of the losses accumulated in March and April. As a result, it has even gained slightly against the USD since the beginning of the year, with the exchange rate now back into the USD/IDR 16,300-16,500 level. This has given the BI confidence to slash the key rate.

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. In fact, the BI has been regularly intervening in the forex market since the beginning of the year, when volatility increased due to capital outflows seen in other EMs as well.

Inflation environment

CPI inflation accelerated to 1.87% y/y in June from 1.60% y/y in May, thus returning to more normal levels following the expiration of the temporary reduction of electricity tariffs for households in Jan-Feb.

Looking forward, inflation expectations have also shifted towards lower inflation this year, with most projections pointing to CPI inflation remaining below the midpoint of the central bank's 2.5+/-1% target band by the end of the year. The latest IMF forecast points to 1.7% CPI inflation this year.

At any rate, Bank Indonesia expressed confidence that CPI inflation will remain under control and within the target band in 2025. This projection looks realistic, in our view, especially given the recent downward trend.

As a result, BI has ample room to cut rates, given that inflation is well below its target. Moreover, with subdued inflation expectations, more rate cuts are unlikely to fuel inflation in the short term. The impact of imported inflation also seems subdued, as despite the rupiah's weakening, CPI inflation has remained below the BI's target.

Conclusion

Looking forward, we expect Bank Indonesia to implement at least one more rate cut by the end of the year, given that high-frequency indicators suggest economic growth will continue to ease in Q2 and Q3.

On the other hand, hopes for a Fed rate cut have grown due to the persistent low inflation in the US, which may prompt other central banks to follow suit and reduce rates as well.

Further reading

Last MPC press release

Calendar of MPC meetings

• Next MPC meeting: August 7
• Current policy rate: 8.00%
• EmergingMarketWatch forecast: 25bps cut

CPI inflation slowed to 3.55% y/y in July H1, setting the stage for a 25bps Monetary Policy Rate (MPR) cut by the CB in August. The deceleration was certainly welcomed, putting CPI inflation below 4.00% for the first fortnight since April H2. However, the disinflation came on the back of non-core inflation, with core inflation remaining disappointingly high, posting the second larges y/y hike in 28 fortnights.

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Core inflation remains a matter of concern to us, considering its current position, at 4.25% y/y in July H1, is not suggesting general inflation is in any path to converge to the CB's 3.00% target. Indeed, services prices remain high, with service inflation remaining above 4.00% since late 2021. Moreover, merchandise prices rose by 4.01% y/y in July H1, up by 1.51pps so far in the year.

In this context, Deputy Governor Jonathan Heath might be right by calling the CB not to cut its policy rate despite the July H1 disinflation. Indeed, we are confident Heath will break ranks with the rest of the board, voting to hold the policy rate at 8.00% in August.

However, we expect four remaining members to vote for a 25bps cut, considering the dovish discourse held in past sittings.

We insist mid-term inflationary expectations might be more relevant than current reads. In this regard, we note the own CB has revised its short-term projections up, while holding the prediction that CPI inflation will meet its 3.0% target by Q3 2026, a forecast not shared by market analysts. The CB will publish on Friday the new consensus forecast found among analysts. Indeed, even if the year-end consensus were to follow the better-than-expected July H1 print and were to fall below 4.00%, we warn 2026 and 2027-end forecasts are way off from the CB's punctual target, showing mid-term expectations are only loosely anchored to the CB's target.

We remind the MPC made it clear that there will be no 50bps cuts ahead, but that further easing should be expected. It remains to be seen if any board members will be joining Heath in August in pondering a pause to the easing cycle. Indeed, we won't be surprised if at least one member begins to mull this possibility, particularly considering it will surprise the market if the CB continue to cut its policy rate in Q4.

We expect the CB will be easing by 50bps in Q3, with two 25bps cuts. The market believes the policy rate will close the year at 7.50%; however, we aren't so sure, believing the outlook for Q4 is not so clear. Accelerating CPI inflation could prevent any further easing, having the MPC close the year in line with the market consensus. However, we insist the dovish discourse of the CB suggests it might be willing to trim the policy rate a bit further.

Overall, we expect the CB will cut its policy rate by 50bps in Q3. We expect the easing to come from a divided board; with only Deputy Governor Heath breaking ranks. The chances of either Deputy Governor Borja or Cuadra joining Heath plummeted on recently recorded disinflation, but might grow again if inflation disappoints or if they begin to refocus on core inflation. We expect the CB will be discussing pausing its easing cycle in the coming sittings. Amid this inflationary pressure, it's very possible that Banxico will not be cutting its MPR during all the remaining 2025 sittings, pausing in one or both Q4 sittings. Thus, depending on the pace of CPI inflation and mid-term expectations, we expect the policy rate to close the year at 7.25 or 7.50%.

• Next MPC meeting: 21 - 22 July 2025
• Current policy rate: 27.5%
• EmergingMarketWatch forecast: 27.5%

The next meeting of the monetary policy committee (MPC) is scheduled for July 21 and 22. At the May MPC meeting, the committee chose to keep the benchmark interest rate at 27.5% for the second consecutive meeting. The MPC cited narrowing exchange rate gaps, falling fuel prices and a positive trade balance as reasons for cautious optimism. Ahead of the upcoming meeting, analysts and stakeholders are divided on the likely policy direction. While some believe that the recent moderation in inflation might justify a marginal reduction in the monetary policy rate (a possible 25bps cut), others argue that the MPC may maintain its current stance to preserve macroeconomic gains and sustain foreign exchange inflows. Several risks could influence the committee's decision, including food supply disruptions caused by insecurity and adverse weather, as well as delays in the release of Nigeria's Q1 GDP data. Today's CPI release showed CPI slowing to 22.2% in June from 22.97% in May, the third consecutive month of prices easing. June's print also marks the lowest rate of inflation in Nigeria since April 2023. However, food inflation rose to 21.97% y/y compared to 21.1% in May, which will be a point of concern for the MPC. We believe the CBN will maintain a cautious approach to allow more time to support a moderation in inflation over the coming months.

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On the foreign exchange market side, Nigeria's external reserves have climbed to USD 37.432bn as of July 12, following a rebound in inflows after a previous decline in the early part of the month. In the first half of 2025, the CBN deployed USD 4.75bn through aggressive foreign exchange sales to banks and bureau de change operators. These sales have contributed to narrowing the gap between the official and parallel market exchange rates. In Cardoso's statement from the last MPC meeting, he said MPC members acknowledged the narrowing gap between the Nigerian foreign exchange market and bureau de change rates as a positive macroeconomic sign.

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Whether analysts believe the MPC will hold or cut rates next week, they generally agree that monetary policy tools have likely reached their limit, with interest rates already exceeding 35% for businesses and the CRR at 50%. Many believe efforts should now prioritize easing food inflation and supporting development finance. The Nigeria Economic Summit Group and others anticipate a more accommodative policy by late 2025, as the economy adjusts to CBN's reforms (including naira floatation and FX backlog clearance) which have seen favourable responses from foreign investors and multilateral institutions.

Monetary Policy Committee Statement

Monetary Policy Committee Meeting Schedule

• Next policy meeting: 15 September 2025
• Current policy rate: 11.0%
• Last decision: Hold (July 30, 2025)
• Our forecast: Hold
• Rationale: SBP to adopt cautious stance to anchor inflation within 5%-7% target range and safeguard fragile external stability amid widening trade deficit

The State Bank of Pakistan (SBP) left its key rate unchanged at 11% in its first policy meeting of FY26 on July 30. The decision came as a surprise, as all 14 economists polled by Reuters had predicted a rate cut. The central bank maintained a cautious stance primarily due to potential risks to the external sector amid rising imports and limited upside for workers' remittances and export growth. These factors, alongside continued spot forex intervention by the SBP, have put upward pressure on the exchange rate.

Moreover, the SBP also cited a worsened inflation outlook as a key reason for holding the policy rate. Higher energy costs are expected to push inflation above the upper end of the 5%-7% target range during some months in FY26.

While the monetary policy statement offered no explicit forward guidance, the SBP emphasized that the real interest rate should remain adequately positive to anchor inflation within its 5%-7% target range. This, in our view, signals a likely extended pause in the policy rate, giving the central bank room to assess evolving risks before making further moves.

External sector

Pakistan's external sector has strengthened considerably in recent month, as reflected by the favourable current account position, which posted a USD 2.1bn surplus (0.5% of GDP) in FY25, a sharp turnaround from USD 2.1bn deficit in FY24. The improvement has come primarily on account of robust workers' remittances, which has offset the sharp rise in goods trade deficit. June also saw record financial inflows, led by refinancing of Chinese commercial debt and disbursement from multilateral creditors. Subsequently, the SBP's forex reserves reached USD 14.46bn as of July 18. The rise in forex reserves has also come on the back of the central bank's ongoing aggressive spot interventions in the interbank forex market.

That said, pressure is reappearing on Pakistan's external sector. In line with economic recovery and lower cotton output, non-oil imports increased by 12.1% in FY25. Total imports in May hit nearly three-year high of USD 5.5bn, despite muted global commodity prices, before falling to USD 5.0bn in June. The Pakistani rupee has been weakening, with the local currency depreciating by 2.3% between Jan. 1 and Jul 22 before paring some of the losses amid renewed security-led crackdown on illegal currency operators.

The SBP projected the current account to post a deficit of 0-1% of GDP in FY26, due to increased import demand, slowdown in global demand and unfavourable export prices - particularly of rice. Moreover, workers' remittances were expected to grow at a notably slower pace to USD 40bn in this fiscal year, after rising by 26.6% y/y to a record USD 38.3bn in FY25.

Despite the current account swinging into deficit, the SBP's forex reserves were forecast to rise to USD 15.5bn by end-December and USD 17.5bn by end-June 2026, driven by improved financial inflows. In a post-policy media briefing, SBP Governor Jameel Ahmad said that public external debt repayments are estimated at USD 26bn in FY26, of which loans worth USD 16bn are likely to be rolled over.

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Inflation environment

Inflation eased to a nine-year low of 4.5% in FY25. The SBP projected price pressures to pick up in FY26, owing to higher energy prices, following upward adjustment in gas tariffs, phasing out of temporary reduction in electricity tariffs, and recent increase in motor fuel prices. It expected inflation to breach 7% in some months but is likely to remain contained in the target range of 5%-7% in FY26. This outlook remain vulnerable to multiple risks, including uncertain global commodity prices and trade outlook, unanticipated adjustments in administered energy prices, and potential widespread floods.

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GDP growth

The SBP noted that economic activity is gaining momentum, supported by easing financial conditions, positive business sentiments and a gradually strengthening macroeconomic environment. Agriculture sector is expected to rebound as better water availability from recent rainfalls improves prospects for crops production. Moreover, the outlook for manufacturing has also improved, bolstered by the prospect of a trade deal with the US and a continued recovery in household spending, aided by a decline in borrowing cost.

Overall, Pakistan's GDP growth is projected to accelerate to 3.25%-4.25% in FY26, up from an estimated 2.7% in FY25. The forecast is in line with the IMF's projection of 3.6% for this fiscal year.

Conclusion

Overall, the SBP's tone appeared cautiously optimistic - projecting inflation to edge up but remain contained, growth to strengthen, and forex reserves to trend upward. However, by maintaining the status quo on the key rate, it showed its readiness to safeguard the fragile external stability in view of rising imports and the uncertain geopolitical environment. We expect the central bank to hold its current monetary policy stance for an extended period.

Further Readings

Previous policy rate decisions

SBP's The State of Pakistan's Economy report

IMF staff report

• Next monetary policy meeting:Aug 28
• Previous rate decision: June 19 (25bps cut)
• Current policy rate: 5.25%
• EmergingMarketWatch forecast: 25bp cut
• Rationale:Commetns from BSP governor Remolona confirms rate cut is not the table in August

The central bank BSP is on track to continue easing in August after delivering a 25bps rate cut in July, in our view. BSP governor Eli Remolona confirmed on July 29 that the central bank is on track to cut its policy rate twice more in 2025, while a rate cut in the upcoming meeting on Aug 28 remains on the table. The central bank remains on the same easing cycle, and it will take "baby steps" towards it target rate, the governor said.

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At the same time, he poured cold water over expectations for more drastic easing as he said that 3 rate cuts this year will require a significant growth slowdown. The BSP will continue to base its decision on upcoming data, Remolona said. As there are only 3 more rate-setting meetings until the end of the year, the BSP will likely cut rates 2 out of 3 times in the remainder of 2025.

BSP's easing remains enabled by the very tame inflation which stood at just 1.4% y/y in June. Even through GDP and export growth remained solid in H1 driven by the front-loading of export orders, uncertainties regarding the external demand backdrop will likely a remain a headwind in H2. At any rate, growth is expected to slow down tangibly compared to 2024, which warrants the BSP to move away from restrictive policy.

Meanwhile, the PHP has continued to strenghtne against the dollar, reaching PHP 57.8 per dollar on Jul 30 from 56.62 at the time of the previous meeting on June 19. The stronger peso is another factor supporting our expectation of a policy rate cut in June. Remolona had signalled earlier that the BSP is unlikely to intervene to curb the local currency's strengthening.

Further reading

Schedule of monetary policy meetings

Monetary Policy Report

• Next MPC meeting: Sep 2-3, 2025
• Current policy rate: 5.00%
• EmergingMarketWatch forecast: 5.00%

Rationale: The Monetary Policy Council decided to surprise with its July decision and cut rates by 25bps, bringing the key rate down to 5.00%, the lowest since April 2022. The consensus had been firmly for no change, and we had also believed the council would hold. CPI inflation of 4.1% y/y remains above the 2.5% target and above the 3.5% top end of the band around the target, though it is set to slow sharply in the summer due to a high base and lower natural gas prices. The power price outlook is likely benign, but the no-policy change path would still suggest room for a price hike in Q4. Fiscal policy remains loose and it is anyone's guess what the Finance Ministry will do with the deficit considering the high political pressure on the ruling coalition after its loss in the presidential election.

The MPC said in its post-sitting statement that the cut rested on the fact that CPI inflation would fall into the range around its 2.5% +/- 1pp target in the coming months. It also approved a new inflation projection that sharply lowered the inflation path and cut the GDP growth projection for 2025. The updated July Inflation Report contains an inflation projection that shows inflation at 3.5-4.4% in 2025, creating a mid-point of 3.95% that is down a sharp 0.95pp from 4.90% in March (range: 4.9-5.7%). That massive March inflation projection overshoot is clearly one reason behind the July cut. The 2026 inflation projection lowered the mid-point by 0.30pp and the 2027 one cut it by 0.15pp, meaning the entire inflation trajectory was shifted downward. Moreover, the 2027 inflation projection mid-point is 2.35%, which is below the target, which undoubtedly helped prompt the cut as well.

In terms of the economy, the new GDP growth projection for 2025 is a range of 2.9-4.3%, giving a mid-point of 3.60%, which is down from 3.75% in March (range: 2.9-4.6%). The inflation projection had a data cutoff date of Jun 9, which is much earlier than usual. But since then, the economic data has been soft, the Middle East war did push up oil prices, though the PMI reading for June was dismal.

One thing to stress is that the MPC termed its July cut in the "adjustment" category it used to describe its May cut by 50bps and this is MPC speak for meaning an easing cycle has not started. That obscures the outlook for the September meeting further.

The power price outlook likewise continues to be a question. The government wants to extend the price cap through Q4, though it contained the relevant legislation in the windfarm bill. The problem is President Andrzej Duda is likely to veto it as the right doesn't like wind power. This will mean the Q4 power price will depend on the new power tariff to be approved for Q4. The daily Rzeczpospolita recently cited unnamed companies saying the tariff should be PLN 540/MWh, which is above the PLN 500/MWh cap, but others say the tariff should be no higher than PLN 500/MWh. There is thus some uncertainty, which probably won't be cleared up until in September.

The fiscal outlook should be clearer by the Sep 2-3 sitting since the government is likely to approve the 2026 state budget bill in late August. It is unclear what the government will do due to the many political uncertainties. On one hand, it originally said it would cut the deficit by 1pp of GDP in 2026, but whether that goal remains is hard to say. It has also said it continues to look at doubling the standard tax deduction by the autumn 2027 election, and that costs 1.5% of GDP by itself. That there is an EU defense spending exit clause makes the situation all the more uncertain. We imagine the FinMin will propose to cut the deficit by something like 0.5-0.7pp and put off the tax deduction decision to 2026.

Overall, MPC member Ludwik Kotecki said at one point that the council could cut by 25bps in July or September, and it is possible that the July cut means the council will not move in September, instead waiting for power and fiscal uncertainties to be cleared up ahead of the October policy meeting. That the MPC described the July cut as 'adjustment' also suggests September caution. But with the lack of a broader explanation behind the July cut, NBP and MPC chair Adam Glapinski's presser on Thurs. becomes even more important. For now, we imagine the council will hold in September and cut again in October, but all could change depending on what Glapinski says.

Archived video of all MPC press conferences

MPC's post-sitting statements

Latest council minutes

Latest NBP inflation report (March 2025)

Most recent MPC voting results

• Next MPC meeting: Jul 24, 2025
• Current policy rate: 46.0%
• EmergingMarketWatch forecast: Cut by 250-350bps
• Rationale: Improving inflation and moderating domestic demand could potentially prompt policy rate decrease

The CBT is positioning itself for a policy rate reduction in July, with a prospective cut ranging, in our view, from 250bps to 350bps. The MPC already acknowledged a significant amelioration in the core inflation trajectory in May, with subsequent indicators suggesting this downward momentum carried into June. The MPC's analysis, we think, highlighted favourable developments in the macroeconomic picture, especially the moderation of domestic demand dynamics observed in Q2. However, the committee remained circumspect, we note, identifying external variables that demanded vigilant oversight. These included the transient geopolitical frictions in the Middle East and the intensification of protectionist trade policies globally, which presented potential impediments to the disinflation process. On the domestic front, entrenched inflation expectations and prevailing pricing behaviour continued to constitute material risks to the attainment of price stability, the MPC noted.

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In this context, Turkstat's June inflation release was below consensus forecasts, registering a 1.4% m/m rise and bringing annual inflation down to 35.1% y/y - a development we deem crucial for CBT's forthcoming policy stance. Taking these developments into consideration, we surmise they reinforce the entrenched annual disinflationary trajectory, potentially justifying a decisive rate reduction of up to 350bps by the CBT. The rationale for such a front-loaded policy adjustment is further strengthened by the lack of an MPC session in August, with the next meeting scheduled for Sep 11.

Conversely, such an action is not without its risks, we note. The magnitude of the initial cut in an easing cycle is instrumental in anchoring expectations. Therefore, an aggressive reduction could precipitate a rapid loosening of financial conditions, potentially terminating the targeted economic cooling prematurely. Furthermore, despite improving inflation expectations, the inherent volatility in food and energy prices persists. Countervailing inflationary pressures also merit serious consideration, in our opinion. Gas utility BOTAS enacted a significant upward adjustment to wholesale natural gas tariffs, which will translate into higher consumer inflation. Furthermore, OTV revisions, sequenced after the dissemination of the June inflation data, are poised to impart both direct and indirect inflationary impetus in July, we note. Considering this confluence of factors, a more prudent course of action for the CBT would be to implement a more conservative 250bps reduction, thereby balancing the progress on disinflation against newly emerging price pressures.

Summary of June rate-setting meeting

MPC rate decision in June

Quarterly Inflation Report for Q2

Monetary policy strategy for 2025

• Next MPC meeting: July 29
• Current policy rate: 5.00%
• EmergingMarketWatch forecast: 4.75%

Rationale: The BCCh's Monetary Policy Council is likely to cut its benchmark interest rate by 25bps to 4.75% in its next sitting on Jul 29. The reduction of external inflationary risks, domestic inflation getting closer to the 3.0% target, and the real economy performing in line with its medium-term potential are all factors that enable a new step toward the nominal neutral monetary policy rate (4.00%). The consensus is also that a cut is coming, which adds to the tactical reasons for a cut in July instead of waiting. The BCCh's own monetary policy corridor had the options of a hold, 25bps cut, and 50bps cut among the plausible options for this sitting.

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Evolution of key variables going into the MPC sitting

Inflation: the BCCh forecast in early June that CPI inflation would converge to the 3.0% target in Q1 2026, after sitting above that mark since 2021. The latest CPI reading, released after the BCCh's forecast, showed stronger m/m deflation than the BCCh anticipated for June. While volatile prices were the key drivers behind the m/m deflation, the annualized core inflation rate of the past three months was at 3.3% y/y. In addition, inflationary risks tied to US tariffs and conflict in the Middle East is subsiding, relaxing one of the constraints on MPR cuts.

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Real economy: the BCCh measured the economy to be growing with virtually no output gap and its forecasts see the GDP rising in line with potential. Upside seems mostly tied to specific export industries, meaning there is no domestic demand-led overheating risks that would stop the MPC from easing monetary policy. Weak job creation contributes to the monetary policy easing argument, though the central bank sees the labor issues stemming from structural factors that don't get solved through monetary policy.

External: the main novelties are the imposition of 50% copper tariffs by the US and the easing of tensions in the Middle East (relative to where things were at the time of the prior decision). The easing of global tensions helps reduce the probability of inflationary shocks, which contributes on the margins to the rate cut argument. As for the copper tariffs, the BCCh is likely to view this as an element with potential to reduce copper prices and domestic investment, so any impact would be deflationary, contributing to the rate cut story as well.

Financial: lending activity has been very subdued and the trend isn't materially changing yet. Interest rate differentials with the US Fed reference rates suggests little room for cuts, but that differential is less of an adequate benchmark in the current environment of USD weakness.

Rate decision forecast

We see an 80% chance of a 25bps cut and a 20% chance of a hold in July. The cut option is what fits best with the recent and expected evolution of key variables. The option to hold remains there because the MPC can always choose to be extra cautious after four years of above-target inflation, especially since the recent performance of the real economy doesn't demand urgent cuts.

In the event of a cut, it will be interesting to see what the post-sitting statement says for guidance. The consensus is that the MPC will cut 25bps twice in H2, but there is disagreement on the timing. We don't expect the MPC to give any firm guidance though, basically leaving the door open to future cuts but without a strong commitment to keep cutting this year.

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• MPC meeting: Jul 31, 2025
• Current policy rate: 9.25%
• EmergingMarketWatch forecast: Cut 25bps

We expect BanRep to resume its cycle of expansionary monetary policy in its Jul 31 sitting, with a 25bps cut in the benchmark rate to 9.0%. We remind that the fiscal shock resulting from the suspension of the fiscal rule in mid-June led the Board of Directors to pause its cycle of cuts, as there was uncertainty about how the fiscal trajectory could influence monetary policy. However, lower-than-expected inflation in June, compared to market expectations, coupled with a sustained appreciation of the peso against the US dollar in June and the first half of July (which has been reversing in recent days), suggests that the majority of the Board will rely on hard data to acquire a dovish tilt, and thus, to find the aforementioned 25bp cut plausible. However, as we will detail below, the composition of the Board, which does not reveal individual votes, adds a layer of uncertainty that makes an accurate forecast difficult.

The case for a cut is based on two pillars. The first is the annual inflation figure for June, which was 4.82%, being the first time it has been below 5% since Oct. 2021. The reading was below market expectations, and provided tangible evidence that the disinflationary process is ongoing. The second pillar, although it comes with a caveat, is the dynamics within the Board. As we reported, the minutes for the last meeting on Jun 27 showed a highly divided Board, with three of the seven members voting for a cut, two for an aggressive 50bps cut, and the remaining one for a 25bps reduction. We believe that the favorable inflation data is the key piece of new information that would persuade at least one of the four members who voted to maintain rates at the last meeting to cut.

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Our assessment is in line with market consensus. The Reuters survey on Jul 26 found that 16 out of 20 economists polled expect a 25bp cut. The decision, however, does not come in a tension-free scenario. The Board must assess progress on both headline and core inflation (the latter proven to be sticky) against the looming risks of a continuously declining government fiscal position. A cut would therefore send a clear signal to markets that inflation is the dominant variable in the Board's analysis, while maintaining the benchmark rate at 9.25% would unexpectedly and irremediably reveal anxieties within the Board about how fiscal risks are overshadowing any significant progress in key variables (e.g., inflation, output, employment, and related factors).

The economic analysis that would support the possible cut begins with inflation, which presents an ambiguous landscape for the central bank. While the headline measure has been contributing significantly, especially in recent months, falling to 4.82% y/y in June due to lower food and energy price pressures, core inflation has remained persistently high, at almost 5.0%, pressured by services inflation (6.0%) and rising goods prices. With inflation expectations at the end of 2025 hovering around 4.8%, this bittersweet mix justifies resuming the cut in the benchmark rate, but also with gradualism and prudence until inflation developments warrant faster cuts.

Furthermore, the resilience of the economy would signal to the Board to focus exclusively on inflation developments, partly due to robust growth in the first quarter of the year (2.7% y/y) and also supported by the most recent figure for the leading growth indicator, the ISE, with a result of 2.8% y/y (which masks, as we reported, significant sectoral divergences: a stagnant manufacturing sector, a depressed energy sector, and buoyant growth only in some subsectors of the tertiary sector). This momentum in growth could give hawkish members signals that the economy can comfortably prevail with the current rate of 9.25% and proceed cautiously, prioritizing a war on inflation without entering into a difficult inflation-growth trade-off.

As we mentioned, the fiscal context is perhaps the most difficult variable, if not the most critical risk factor, for maintaining a hawkish stance. The suspension of the fiscal rule was mentioned in the minutes of the last meeting as an event that affects the sustainability of public finances and could reduce monetary policy maneuverability. After the June meeting, Finance Minister Germán Ávila took the opposite position, arguing that only a 50 bps cut could have given the economy the boost it needed. This conflict between the government and the central bank could lead to a classic situation of 'fiscal dominance,' in which the independence of the central bank could be compromised to support government financing. That said, June's hawkish stance unequivocally signaled BanRep's independence to the market, and it remains to be seen how quickly and credibly the government will implement any fiscal measures.

Concerning the external context, although it is not insignificant, we do not see it as decisive for this coming meeting. The nominal exchange rate has been a barometer of the external context: sustained appreciation in the face of uncertainty over the trade war and tensions between Israel and Iran, which drove oil prices up, but which quickly reversed in the face of President Trump's softer rhetoric and openness to formalizing trade agreements (as in the recent case of the EU).

In short, we believe there is a case for a moderate 25bp reduction in the benchmark rate, supported by (1) favourable inflation data, (2) a divided but almost evenly split Board, with swing members who could tip any vote in an unexpected direction, and (3) rising real rates due to lower inflation in a context of a constant benchmark rate. In the latter case, the point is not to generate unexpected pressures on the economic recovery. That said, we cannot dismiss a likely alternative scenario, in which the reference rate remains unchanged, supported by (1) the traditional "prudent", data-driven approach BanRep touts, (2) the scenario of possible 'fiscal dominance' that compromises the independent work of the central bank, especially in order not to compromise the country's risk premium and the sustainability of public debt, and (3) a prudent pause to monitor inflation performance, where the July data, to be published on Aug 8, will be key.

In this regard, as we have been reporting, the composition of the Board is key and compromises any forecast. The Board is chaired by the Minister of Finance, appointed by the President. In this case, Petro has been insistent on greater and faster cuts, and his minister has followed suit. At the beginning of the year, two new members joined at the request of the president: Laura Moisá and César Giraldo. We would expect both to always align with the government. Still, Moisá, whose appointment was controversial in the market due to her 'lack of academic and monetary policy experience,' hinted at a 'gradual approach to rate reduction' in her first public statements a few weeks ago, showing herself to be a 'swinger,' even 'hawkish.' Petro also appointed Olga Acosta, and although the market welcomed her appointment, she has shown a tendency towards BanRep's technical, data-driven approach, so that we would classify her as a "swinger".

On the other side is Governor Leonardo Villar, who has publicly reiterated a prudent approach to monetary policy management, subject exclusively to new information available, probably due to his experience as a member of the Board for 12 years, supporting BanRep's technical staff. He would be joined by Mauricio Villamizar, who, interviewed by Bloomberg a few days after the interview with Moisá, made clear his hawkish stance, contradicting the government's claims of 'benign effects of inflation' and justifying this in his work as a researcher at the central bank and deputy manager of economic studies. Finally, Villar would also be followed by Bibiana Taboada, appointed by President Iván Duque, daughter of one of former President Álvaro Uribe's close allies, who would have no incentive to favour Petro vis-à-vis the BanRep technical team and whose appointment was highly controversial at the time due to her credentials in public policy, age, and inexperience in monetary policy.

All this to say that the vote could go either way, beyond the market forecast and what the economic analysis presented here would suggest as the most likely outcome.

• Current policy rate: 4.50%
• Next monetary policy meeting: Aug 20, 2025
• Expected decision: Hold or 25bps cut

While in the long-term the inflation path is seen clearly downward sloping, it is difficult to project inflation developments in the short-term, and therefore the next rate decision is clouded by uncertainties. The MPC held the policy rate steady at 4.50% on Jul 7, as broadly expected, and continued to stress on the need for a cautious approach when taking monetary policy decisions. It is clear that the monetary policy will start easing at some point but this would be very data-dependent, namely predictability would be with a higher degree of certainty after July inflation is released, which will take place just ahead of the next rate decision on Aug 20, we think. Overall, we think that the rate-setters would not take a bold decision to start lowering the policy rate until inflation enters the 1-3% target range but the general expectarions are that a cut might be made either in August or in September.

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Inflation did slow in May, to below expected 3.1% y/y but then accelerated again to 3.3% y/y in June and a great bunch of the volatility was caused by flight tickets. We note that this component has been very volatile after a change in methodology and has also caused large volatility in headline inflation. Still existing supply side shortages that might not close fast enough to respond to potential surge in demand are another factor that can drive inflation highers. Some retailers have continued to up prices, according to media reports and the BoI expects some upward impact to come also from rental prices after the damages to buildings by Iranian rockets, which is already seen in June inflation. On the other hand, the shekel appreciation is to offset some of the upward pressure but it is not clear for now what forces would prevail. The latest inflation expectations, one of the major considerations the MPC is looking at when deciding on the policy rate, pointed to continued moderation in the inflation environment. Inflation has been above the 1-3% target range for a full year already. The BoI still expects it to enter the target in H2 though as the latest forecast released in July sees inflation at 2.6% y/y in Q4 on average and to ease further to 2.2% y/y on average in Q2 2026.

GDP data in Q1 point to strong economic activity but when looking at details, growth appears fragile as it was backed by residential construction and inventories mainly. Yet, the economy exceeded its pre-war level and at least part of the weaker domestic demand components could be explained with advanced purchases ahead of the VAT rate hike at the start of 2025. The latest state of economy index, another major indicator in rate decisions, suggested weaker economic activity with BoI commenting that the indicator pointed to a pace of growth that was slower than the long-term average. The BoI downgraded growth forecast for this year in its July update but increased it for 2026 as recovery after the wars is expected to be faster. On the other hand, the impact of the new US import tariffs are expected to be lower. We note that US tariffs were expected to cut from growth 0.5pps each in 2025 and 2026, according to the BoI forecast from April. Thus, with expectations for no significant deterioration in economic activity, the BoI might take its time and make sure that inflation has been entrenched within the target interval before making any move, in our opinion. At the same time, the research department expects the policy rate to reach 3.75% in one year from now. This is not a forecast of the MPC but has likely been endorsed and if fulfilled, this means three rate cuts in the next one year.

Board statements, press briefings, minutes from MPC meetings

Calendar of MPC meetings

Latest BoI macroeconomic forecasts

Monetary policy reports

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The Monetary Committee

• Current policy rate: 16.5%
• Next monetary policy meeting: Aug 29
• Expected decision: hold

On Jul 11, the NBK kept the base rate on hold again, in line with our expectations. The bank's current assessment is that domestic factors account for the main inflationary pressures. These include imported food prices and tariff reform, although we remind that the latter will be halted in Q4 to help inflation management. Credit growth and demand conditions persist as concerns as well. Households' inflation expectations eased in June, but have fluctuated a lot and thus imply risks of volatility.

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The NBK's next macro forecast round will take place in August, though for now it believes the base rate's disinflationary effect is yet to intensify. In addition to its tight stance, the bank also expects an impact from the FX sales mirroring gold purchases and the increase of minimum reserve requirements for local lenders. The NBK has also pledged consolidated efforts with the government and has expressed particular hope for fiscal consolidation. We remind that this week the EconMin said year-end inflation is seen at 10-11%. This is below NBK's current forecast (10.5-12.5%) and seems to indicate there are no plans for an upward revision.

All in all, the NBK has reiterated its comments that the base rate is most likely to remain on hold at 16.5% by the end of 2025. Despite the tariff hike pause, we still think domestic pressures can increase in H2 as local businesses have resorted to price increases ahead of the new tax code's implementation. In general, the NBK has not ruled out monetary tightening either, but we think a rate hike will only be considered in critical conditions.

• Next policy meeting: Aug 28
• Current policy stance: 2.50%
• Our forecast: Cut by 25bps
• Last decision: July 10 (Hold)
• Rationale: Bank of Korea still likely to ease policy further this year due to the looming impact of tariffs on growth

The Bank of Korea is likely to cut its Base rate by 25bps at its next policy meeting on Aug 28, but the central bank still needs to receive confirmation that real estate prices have stabilized before it proceeds with further cuts. BOK decided unanimously to keep its policy rate unchanged at 2.50% in the previous meeting on July 10, citing speculative pressures in the country's real estate market as the main reason for the decision. The central bank stated that it will monitor whether the lending restrictions implemented in late June and early July will be sufficient to ease growth in real estate prices.

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Despite its temporary pause on July 10, the BOK clearly remains in a rate cutting cycle with 4 out of its 6 MPC members expecting more rate cuts in the next 3 months. Nonetheless, the urgency to deliver rate cuts has diminished as the government approved a second supplementary budget in June which includes consumption stimulus program worth KRW 14tn which started to be implemented in July. The Bank of Korea expects that the second supplementary budget will boost growth by just 0.1pps in 2025, but the effects of the improving political stability and consumption stimulus are already visible. For instance, consumer confidence reached the highest level since 2018 in July amid surging sentiment about the economy.

The BOK will monitor two key factors to determine the timing of future rate cuts. First of all, apartment prices in Seoul need to stabilize as they showed signs of rampant speculation in late June. In addition, the developments in the trade talks currently ongoing between Korea and USA will be also crucial. If South Korea fails to achieve a trade deal by the deadline of Aug 1 and tariff uncertainty continues, the central bank may have to deliver rate cuts sooner in order to calm the situation. On the positive side, the Korean won has strengthened consistently over the past few months which unties BOK's hands to continue with more easing.

Economic data

CPI inflation accelerated to 2.2% y/y in June from 1.9% y/y in May, but core inflation remained stable at 2.0% y/y in June. Going forward, the recent floods are likely to put some upward pressure on fresh food and vegetable prices, but at the same time the fall in oil prices after the decline of tensions in the Middle East should help to offset that. Thus, we think that the central bank will not be particularly concern about inflation going forward. The signing of a trade deal that reduces tariffs on US agricultural imports could be also actually deflationary for South Korea.

Looking at exports, they increased by 4.1% y/y in Jul 1-20 when accounting for the different number of working days. Exports of semiconductors remain particularly robust, but some softness is being observed in exports to both China and the USA. Thus, we think there is a tangible risk that external demand might start to deteriorate rapidly in H2 when the impact of tariffs on the global economy will be fully felt. In addition, the front-loading of export orders before Aug 1 will simultaneously soften growth in the months to come and hide the true impact of tariffs on the economy. Thus, we think that South Korea is definitely still not out of the woods and the BOK will have to support the economy with more rate cuts until the end of the year.

When it comes to the crucially-important apartment prices data, the latest Korea Real Estate Board data showed a deceleration in Seoul apartment price growth to 0.19% m/m in second week of July from 0.29% w/w in preceding week. Thus, there are tentative signs that the mortgage curbs implemented in late June and early July will be sufficient to rein in speculation. At any rate, we expect that regulators will adopt more macro-prudential measures to rein in prices if their previous efforts prove insufficient.

Last MPC press release

Calendar of MPC meetings

• Next policy meeting: September 4, 2025
• Current policy rate: 3.00%
• Our forecast: Hold
• Last decision: Cut by 25bps (July 9)
• Rationale: Although policy space remains for an additional rate cut, BNM is expected to maintain its current stance unless growth outlook deteriorates more than expected

Bank Negara Malaysia cut its overnight policy rate by 25bps to 2.75% on July 9, marking the first rate cut since June 2020. The decision was in line with the market consensus, although a significant number of analysts had expected the central bank to wait for more concrete signs of economic weakness before adjusting policy. BNM termed the rate cut as a "pre-emptive" measure to preserve and secure Malaysia's steady growth trajectory amid rising external risks due to US tariffs.

The move came just days after the President Trump announced a 25% tariff on goods imported from Malaysia, while continuing to exempt the critical semiconductor sector from the tariff list. The sector accounts for more than a quarter (28.3% in 2024) of its total exports to the US. The tariffs are scheduled to take effect on August 1, unless Malaysia reaches a trade deal with Washington, a scenario that appears unlikely, given that several sticking points, mainly involving non-trade barriers, remain unresolved.

We view BNM's move as a one-off adjustment rather than the beginning of an easing cycle. Despite external headwinds, the central bank noted that the economy remains on a strong footing, underpinned by resilient domestic demand. That said, further easing cannot be ruled out if the growth outlook deteriorates. With inflation contained and the ringgit strengthening, BNM has sufficient policy space to deliver another rate cut if needed.

GDP growth

Malaysia's economy is expected to fall short of the official 2025 growth target of 4.5%-5.5%. This outlook was also acknowledged by BNM, which noted that the balance of risks to the growth outlook are tilted to the downside, mainly due to a slower global trade, weaker sentiment, and lower-than-expected commodity production. Nonetheless, domestic fundamentals remain solid, supported by favourable labour market conditions and strong investment activity. In addition, continued global demand for electrical and electronics (E&E) and a rise in foreign tourist arrivals are expected to bolster export performance.

In a post-policy interview with state media Bernama, BNM Governor Abdul Rasheed Ghaffour said that the central bank would release its revised GDP growth forecast for 2025 by the end of July. However, he added that any revision is likely to be marginal. Malaysia's GDP growth eased to 4.4% y/y in Q1 2025.

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Inflation environment

Inflationary pressures in Malaysia remain subdued, with CPI inflation easing to over four-year low of 1.2% y/y in May. In the first five months of this year, inflation averaged 1.4%, down from 1.8% in the same period last year.

BNM reiterated that inflation in 2025 is expected to remain moderate owing to contained global cost conditions and the absence of excessive domestic demand pressures. It also stated that it did not anticipate any significant inflationary impact from domestic policy reforms. Last month, the government announced an expansion of Sales and Services Tax (SST), effective July 1, bringing more goods and services under the tax net. Additionally, the rationalization of RON95 gasoline subsidy is expected to be rolled out in the second half of this year, although an exact implementation date has yet to be announced.

BNM will release its updated inflation forecast for 2025 alongside the revised GDP growth projection, Abdul Rasheed said. The central bank currently projects inflation in the range of 2.0%-3.5% for this year, consistent with the IMF's latest projection of 2.4%.

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Exchange rate

BNM said that the ringgit's performance continues to be primarily driven by external factors. Since April, the local currency has appreciated by 4.7% against the USD, buoyed by healthy foreign inflows into the Malaysian bond market. In May, overseas investors bought a net MYR 13.4bn worth of both government and private bonds, the highest monthly inflow in over 11 years, following net purchases of MYR 10.2bn in April. These robust inflows have led BNM to accumulate foreign exchange reserves, which rose to nearly 11-year high of USD 120.6bn as of end-June.

BNM noted that Malaysia's favourable economic prospects and domestic structural reforms, complemented by ongoing initiatives to encourage flows, will continue to provide enduring support to the ringgit. Last month, S&P Global projected that the ringgit would continue its appreciating trend, forecasting it to reach 4.22 against the USD by end-2025. As of July 16, the USD/MYR exchange rate stood at 4.2440.

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Conclusion

In a proactive move, BNM cuts its key rate by 25bps in response to the potential direct and indirect impact of US tariffs on Malaysia's economy. The resulting lower borrowing costs, along with stable price conditions and tight job market, are expected to help sustain consumer spending and support overall growth. The rate cut follows a 100bps reduction in the statuary reserve requirement (SRR) ratio in May, bringing it to a 14-year low of 1%, a measure expected to inject about MYR 19bn in liquidity into the banking system.

We expect BNM to hold its key rate at 2.75% for an extended period unless further downside risks to growth emerges. This outlook is in line with the median forecast of economists polled by Reuters, who expect the OPR to remain at the current level until at least the end of 2026.

Further Readings

Previous OPR decisions

Meeting schedule

BNM annual report

• Next MPC meeting: Aug 8, 2025
• Current policy rate: 6.50%
• EmergingMarketWatch forecast: Hold

Rationale: Romania's central bank will very likely maintain the key policy rate at 6.50% in the Aug 8 MPC meeting, in our view. The NBR assessed in its press release announcing the policy rate-hold decision on Jul 8 that the government fiscal measures package would exert significant pressure on inflation in the short term, so cutting rates may not be such a good idea so soon, despite prospects of an economic downturn this year. However, the central bank also mentioned that the fiscal tightening was more likely to carry stronger disinflationary pressures over the longer term, mainly through effects exerted on aggregate demand. Therefore, we believe that the NBR might consider a rate hike in the last meeting for 2025, in November, to give a hand to the economic recovery. Besides, increased investor confidence backed by the new cabinet's willingness to reduce the fiscal gap lowers risks to further depreciation of the local currency.

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The central bank revised upwards its inflation forecast for end-2025 to 4.6% from 3.8% due to higher core and energy inflation expectations, but without considering the impact of the May currency depreciation and effects of the fiscal tightening. The currency depreciation may add 0.3pps to the forecast, according to NBR Governor Mugur Isarescu, while the finance ministry said that the fiscal tightening could add 1.5-1.8pp more. Therefore, we expect the next Inflation report to present another upward revision of the inflation projection for 2025 and possibly for 2026. Isarescu did not rule out a rate cut in H2, yet he also conditioned that on financial markets stabilisation, liquidity returning to comfortable levels, capital outflows normalisation and money market rates falling below the current level of the key rate. Since the NBR said that effects on the inflation coming from the fiscal tightening would be temporary, there is a chance for a rate cut in November, we believe.

The CPI sped up above expectations to 5.66% in June from 5.45% y/y in May, making a rate cut even more challenging. The NBR projected the CPI at 5.1% at end-Q2 and 4.6% at end-2025, but forecasts did not include the financial markets turmoil after the first round of the presidential election that notably depreciated the local currency and the inflationary fiscal tightening measures applied as of August.

• Сurrent policy rate: 20.0%
• Next monetary policy committee meeting: July 25
• Expected decision: 200bp cut

We agree with the market that a 200bp cut should be the baseline scenario for CBR's decision this Friday. While uncertainty around the outcome remains, we can confidently exclude any hike options. The CBR may still opt for a 100bp cut to buy time before the September MPC meeting or go for a 300bp cut to prevent further cooling and support the budget. However, based on the latest data, we believe a 200bp cut is the most logical choice, possibly accompanied by a slightly softer signal, though still closer to neutral, to temper market expectations.

Inflation slowed in June (0.2% m/m vs. 0.4% m/m in May), and the July weekly print (including utility tariff indexation) faded quickly. As of July 14, annual inflation declined to 9.3% y/y. While this remains well above CBR's target, the SAAR calculated by the CBR dropped to the 4.0% target in June, down from 4.5% in May. PPI inflation has been declining y/y since February, and this trend likely continued in July, despite utility indexation in industry. Inflation expectations have stabilized, albeit at elevated levels. Overall, CPI dynamics support a relatively strong rate cut. However, the inflation trend could reverse sharply, as observed during the previous tightening cycle, which can stop the CBR from deeper than 200bps cuts.

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Real sector data also point at cooling of the economy. GDP growth remained low at 1.2% y/y in May and retail sales continued to moderate, though unemployment fell to a record low of 2.2%. June industrial production data are to be released tomorrow evening, but PPI surveys suggest further slowdown, making a strong rebound in output unlikely. On the other hand, real wage growth in April exceeded March levels, which is an alarming signal for the CBR. On balance, this set of arguments also supports a rate cut.

The updated macroeconomic forecast, to be announced with the rate decision on Friday, will play a key role in setting the policy trajectory. On market rates, all of the top 20 banks have already lowered both deposit and lending rates. They made similar moves in June, which helped suppress borrowing activity among households and businesses. Household lending is now contracting at a faster pace (excluding preferential mortgages) while corporate lending has slowed to its weakest since the war started.

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CBR officials, including Governor Nabiullina, have said a rate cut is on the table if the positive trend holds - that is likely the most dovish signal we could expect. That said, the CBR has a track record of surprising markets in both directions, so this does not guarantee a 200bp cut. A smaller or larger move may deeply depend on the budget process. By the September meeting, the CBR should have more clarity on further budget amendments and the 2026 draft. With oil prices low, ruble REER appreciating, and a cooling economy potentially weighing on non-oil revenues, the 2025 deficit may widen, thus implying stronger fiscal stimulus. Additionally, speculation about potential peaceful resolution to the conflict in Ukraine is growing, amid uncertainty over the US political stance. A ceasefire or peace deal could lead to a sharp drop in fiscal spending and slower income and industrial growth. However, we doubt such a scenario can materialize in the coming months.

Next MPC announcement: July 31, 2025

Current policy rate: 7.25%

EmergingMarketWatch forecast: 7.25%

We are changing our interest rate call for the next MPC meeting to a hold at 7.25%. We think the central bank would prefer to hold the rate steady amid increased uncertainty about the impact and implementation timeline for higher import taxes in the US. It seems that the US is stepping up the tariff pressures on the rest of the world. Some tariffs have already been implemented in April and other steep charges were announced in July, including 30% tariff on the EU, 50% tariff on copper imports, as well as high tariffs on select economies (South Africa included). US headline and core CPI growth accelerated somewhat in June which could support the concerns of the Fed about materialising inflation risks and therefore postpone further interest rate cuts.

This concern also troubles SARB governor Lesetja Kganyago who said in a radio interview on Jul 16 that the central banks globally have started to lower policy rates after having had to tighten policies since 2022. However, since the imposition of tariffs, the US central bank decided to slow down and stopped adjusting rates which in turn would generate higher borrowing rates elsewhere.

We remind that the high US tariffs scenario researched by the central bank in May (assuming 10% global tariffs, higher global inflation and currency depreciation of 10%) indicates inflation accelerating to 4.9% in 2026 from 3.7% in 2025 (4.2% and 3.2% in the baseline respectively). This in turn leads to end-2025 interest rate at 7.9% and end-2026 at 7.4% (7.2% and 7.1% in the baseline respectively) as well as to a lower GDP growth below 1% in the next two years.

Kganyago also noted the risks stemming from geopolitical tensions which elevate the volatility of financial markets and commodity prices. As it can be recalled, the regulator already increased fuel prices as of July by ZAR 0.55/l of petrol and ZAR 0.82/l of diesel. The mid-month Central Energy Fund (CEF) data points to another increase shaping up for August, worth ZAR 0.62/l of diesel, although petrol prices may be cut by ZAR 0.2/l. Fuel prices remain deflationary due to base effects but the pace will slow in the second half of the year. In our estimates, fuel prices could add about 0.5pps to headline CPI growth in June and July combined, although their contribution seems stable in August for the time being.

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At the last meeting in May, the central bank also stated its preference to lower the inflation rate target, pointing to the benefits for the economy in the long run. The MPC said in May that technical work is at an advanced stage and Kganyago confirmed in an interview this week that a report with the distilled research findings will be presented to himself and the finance minister and a decision will be announced in due course. We note that the inflation target is set by the minister of finance in consultation with the central bank. The current 3-6% target range was announced by finance minister Trevor Manuel in his budget speech in Feb 2000. We do not expect the central bank to make an announcement about the potential lowering of the target on Jul 31 although it stated expressly in May that the 3% scenario is more attractive than the 4.5% baseline. We think the central bank will wait for the finance minister to get fully on board with the transition to a lower target although some economists are pointing out that it is best to make the shift soon before inflation expectations start creeping up along with actual inflation in the second half of the year.

Monetary Policy Committee Statement

Monetary Policy Committee Forecasts and Assumptions

Monetary Policy Review

• Next Policy Meeting: Sep 24
• Overnight Policy Rate (OPR): 7.75%
• Previous Decision: 25bps cut (May 22)
• Latest Decision (Jul 23): Hold
• Rationale: CBSL pauses to assess inflation path and transmission effects amid easing deflation and resilient growth

At its July 23 meeting, the Central Bank of Sri Lanka (CBSL) kept the Overnight Policy Rate unchanged at 7.75%, following a 25bps cut in May. The decision reflects the Monetary Policy Board's confidence that the current stance is adequate to guide inflation toward its 5% target while maintaining the growth momentum. This marks a shift in tone from easing to cautious observation, as the Bank evaluates transmission effects from its earlier cuts and balances upside inflation risks against external vulnerabilities.

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The symmetric corridor, with the Standing Deposit Facility Rate (SDFR) at 7.25% and the Standing Lending Facility Rate (SLFR) at 8.25%, remains intact under the revised monetary framework introduced in November 2024.

Inflationary Landscape

Deflationary pressures continued to ease through June, with Colombo CPI deflation narrowing to -0.6% y/y from -4.2% in February. While headline inflation remains negative, the CBSL now projects it will turn positive within the current quarter and gradually align with the 5% target by 2026. Core inflation rose to 1.5% y/y in June, suggesting demand-side recovery is taking hold.

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The upward revision of electricity tariffs by 15% in mid-June will likely accelerate the headline inflation rebound, especially after eight straight months of deflation. The central bank's July statement confirmed this outlook, highlighting gradually rising core inflation and inflation expectations. With inflation now near a turning point, the decision to hold rates signals CBSL's intent to let past policy easing work through the system before resuming further adjustments.

Growth Dynamics

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Sri Lanka's economy expanded 4.8% y/y in Q1 2025, following 5.4% in Q4 2024. The deceleration stemmed largely from a slowdown in industrial activity, particularly construction, although services and financial sectors remained resilient. Agriculture also saw a slower contraction of 0.7% y/y, pointing to stabilisation.

Forward indicators remain mixed. While April industrial output rose just 1.7% y/y-the slowest pace in nearly a year-June's Manufacturing PMI stood at 51.9 suggesting tentative recovery. Private sector credit has expanded robustly in the first half of 2025, aided by lower lending rates and improved banking sector liquidity. The CBSL expects this trend to continue and underpin broader economic recovery.

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External Sector Watch

Despite a wider trade deficit, Sri Lanka's external position remains strong. The current account surplus reached a record USD 190.6mn in May, and cumulative surpluses for the Jan-May period rose to USD 1.3bn. Worker remittances remained buoyant at USD 635.7mn in June, marking four straight months of inflows above USD 600mn. Tourism revenues rose to USD 169mn in June, supporting the services balance.

Gross official reserves were stable at USD 6.5bn by end-June, helped by regular net FX purchases by the CBSL and the timely disbursement of the fifth IMF-EFF tranche in early July. While the Sri Lankan rupee has depreciated modestly YTD, healthy reserve coverage provide comfort against global shocks.

Outlook

The CBSL has pivoted to a holding pattern, balancing the need to support recovery with its price stability mandate. With inflation expected to return to positive territory and growth holding steady, the central bank is likely to stay on pause through Q3 2025. The May rate cut is still transmitting through the system, with market interest rates adjusting lower and credit growth strengthening.

Further easing will be contingent on benign inflation, fiscal discipline, and external stability. The CBSL's next moves will hinge on how energy prices, credit conditions, and global financial volatility evolve in the months ahead. Further, the US tariff deal and trade fragmentation will also weigh on CBSL's next decision. For now, policy is calibrated to stabilise inflation while preserving the gains in macroeconomic recovery.

Further Reading

Monetary Policy Review, July 2025

Monetary Policy Review, May 2025

Monetary Policy Review, March 2025

• Next MPC meeting: Aug 13

• Current policy rate: 1.75%

• Previous meeting (June 25): Hold

• EmergingMarketWatch forecast: 25bp cut

• Rationale: Domestic political uncertainty, trade war headwinds both warrant resumption of rate cuts

The Bank of Thailand is likely to resume cutting rates in its next policy meeting on Aug 13 amid the heightened growth headwinds coming not only from the rising uncertainty over trade war outcomes, but also the worsening domestic political situation. To remind, the Bank of Thailand held its policy rate at 1.75% and raised the forecast for 2025 growth by 0.3pps to 2.3% in the previous meeting on June 25. In our view, the Bank of Thailand still has leeway to do 1-2 small rate cuts in 2025 and is certain to cut rates at least 1 more time this year as the bank is still in an easing cycle.

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The growth outlook is projected to deteriorate significantly in H2 as the economy braces for the impact of US tariffs, while the domestic political situation remains unresolved. Thailand has thus far been unable to reach an agreement with the US on tariffs and faces tariff rate of 36% from Aug 1 if the government fails to strike a trade with the Trump administration. At the same time, PM Paetongtarn Shinawatra has been suspended due to an ongoing inquiry by the Constitutional Court and may be ousted when the Court releases its verdict in her case within the next few months.

Looking at recent inflation figures, CPI fell for a third straight month by 0.25% y/y as it was dragged down by supply-side effects. In addition, bank lending activity remained lacklustre in Q2 on the back of weak credit demand and tightened bank lending standards. At the same time, the Thai Baht has continued to strengthen against the US dollar since early April, further aggravating the competitiveness of Thai exports. Economic growth has remained robust throughout Q2, however, much of the strength in exports and output was likely due to front-loading or orders during the tariff pause announced by President Trump.

Overall, recent economic data and market moves bode well for additional policy easing by the Bank of Thailand. That said, there is still a lot of time until Aug 13 and the central bank will continue to monitor closely global trade dynamics and trade deal negotiations in order to decide on its future policy moves. In our view, the key developments to watch remain the trend in exports and manufacturing output, the progress on trade talks and the strength of consumer demand amid worsening political crisis in the country.

Useful link

MPC meetings

• Current rate: 15.5%
• Next rate decision: Sep 11
• Our forecast: On hold

The board of the central bank (NBU) on Jul 24 decided to keep the key rate on hold at 15.5%. The third on-hold decision in a row was widely expected. The NBU stated that headline CPI inflation was down to 14.3% y/y in June after peaking at 15.9% in May, while core inflation, which fell to 12.1% y/y in June, was lower than anticipated. The NBU expects further disinflation in H2 2025 on a better harvest, moderate external pressures, and an improved labour market. At the same time, it revised the inflation forecast for end-2025 upwards to 9.7% from 8.7% and for end-2026 also upwards to 6.6% from the target of 5.0%.

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The NBU is going to cut the key rate by only 50bps to 15.0% by end-2025, whereas earlier the rate was expected to decrease to 14.0%. The NBU's new forecast for end-2026 is 12.6%, up from 11.6% previously. Russia's war naturally remains the main risk. On the upside, Ukraine has secured enough foreign assistance for this year. President Volodymyr Zelensky was warned by donors last week that assistance could be cut for him signing a law aimed to dismantle independence of Ukraine's anti-corruption bodies. But Zelensky reversed his decision, and parliament is scheduled to cancel the controversial law tomorrow, Jul 31. The next MPC meeting is scheduled for Sep 11. As things stand now, the NBU is likely to again leave the key rate unchanged in September.