• 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: Jun 16-17, 2026
• Current policy rate: 14.50%
• EmergingMarketWatch forecast: 25-bp cut (to 14.25%)

Inflationary pressure stemming from the Middle East conflict is increasing pressure on the BCB's Copom to pause the monetary easing cycle after its June policy meeting, in our view. Alongside this inflationary pressure, persistently de-anchored inflation expectations are also likely to weigh on the Copom's ongoing easing cycle, although this is likely to happen only after the additional 25-bp cut expected at the Jun 16-17 meeting. That cut is still likely to be supported by slowing economic growth, reinforcing the BCB's perception that the monetary tightening implemented in 2025 has been effective.

IPCA-15 inflation rose to 4.64% y/y in 12-month cumulative terms through mid-May, exceeding the market consensus and breaching the 4.50% upper limit of the +/- 1.50-pp fluctuation band around the 3.00% target for the first time since October 2025. Higher food prices drove the increase, reflecting indirect impacts from the energy shock, while the higher electricity tariff flag and increases in health and personal care prices also contributed to the acceleration. Transport prices, however, declined m/m in May, likely reflecting a base effect alongside the impact of government fuel subsidies.

Alongside direct inflationary pressure from the Middle East conflict, persistently de-anchored inflation expectations have become an increasing concern for Copom members, especially regarding 2028 expectations. For 2026, analysts polled by the BCB raised their inflation forecast this past week to 5.04% y/y, surpassing the 5.00% threshold for the first time this year and moving further above the 4.50% upper limit of the target range. Analysts expect inflation to gradually converge toward the 3.00% target, although forecasts suggest the midpoint would only be reached after 2029. Analysts have also raised inflation expectations for 2028 (although not in this week's Focus Report), a particularly relevant horizon for the Copom, as the committee understands that this period should theoretically no longer be materially affected by the current shock. Brazil's indexation mechanisms are likely contributing to this upward revision, which is expected to weigh on future Copom decisions.

While still expressing concerns about inflationary pressure stemming from the Middle East conflict and emphasizing the need to distinguish between direct and second-round effects of the energy shock, BCB Governor Gabriel Galípolo recently stated that the positive output gap has been narrowing toward potential output as a result of the Copom's monetary tightening. In our view, his remarks reflect how the Copom is currently assessing the environment: tight monetary conditions implemented in 2025 have contributed to slowing economic growth, reinforcing the effectiveness of policy tightening and allowing room for gradual Selic cuts, while external shocks continue to pressure domestic prices and therefore require a more cautious approach and a tougher stance on inflation control.

Overall, the energy shock continues to add inflationary pressure to domestic prices, particularly food prices, which play a central role in household budgets. Although inflation continues to rise and the IPCA-15 breached the upper limit of the target range in May, we still believe the Copom is likely to cut the Selic rate by 25bps to 14.25% at its June meeting before potentially pausing the ongoing easing cycle. The cut will likely be supported by slowing economic activity, while the Copom continues to assess second-round effects from the energy shock. The committee is also likely to maintain its strategy of providing no forward guidance amid elevated external and domestic uncertainties.

• Next MPC meeting: Jun 18, 2026
• Current policy rate: 3.50%
• EmergingMarketWatch forecast: hold

Rationale: While the CNB board adopted an expectedly more hawkish tone at its latest MPC meeting in May, it also maintained a cautious stance. The current level of the policy rate is still perceived as slightly restrictive, and the impact of the Iran war on inflation has been primarily through first-round effects only. There is apparently a consensus on the board that the CNB can afford to wait a bit longer before it tightens monetary policy. The CNB started from a much more comfortable position than other central banks, like the ECB, for example. Still, risks remain clearly to the upside, and the CNB revised the outlook from balanced to inflationary.

Core inflation remains the indicator to watch, but the CNB already expects it to remain around 3% throughout 2026. Thus, only further upward gains are likely to trigger a rate hike, while gradual upward pressure is unlikely to matter that much. We also expect that food prices may be a factor, especially if they start rising sooner than currently expected. The issue with food prices is mostly related to inflation expectations, which could get deanchored from the 2% target if households start feeling price pressure again. The CNB has noted several times that households have become more sensitive to food and energy price hikes, so we expect the CNB to monitor closely those two categories.

We continue to expect that some monetary tightening will be inevitable, but it looks like it will be later in 2026. If supply chains do not get squeezed further, we expect 25bp rate hikes some time in H2, possibly starting in August. Then, the policy rate will be brought back to 3.50%, and it will likely remain at that level for a while. Given the state of the economy, we see enough domestic price pressure to prevent any lower interest rates in the medium term.

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Further Reading:

CNB board statement from latest MPC meeting, May 7, 2026

Post-meeting press conference, May 7, 2026 (in Czech)

Q&A after the latest MPC meeting, May 7, 2026

Minutes from the latest MPC meeting, May 7, 2026

Monetary Policy Report, May 2026

Macroeconomic forecast, May 2026

Meeting with analysts, May 11, 2026

CNB board profile

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

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

• Next MPC meeting: May 21, 2026
• Current policy rate: 19.5%
• EmergingMarketWatch forecast: 19.5%

The MPC will hold an interest rate meeting on Thursday (May 21) and we think the committee will keep interest rates on hold due to the still elevated inflationary risks and prevailing global uncertainty. Somewhat surprisingly, consumer inflation slowed in April, reflecting slower non-food inflation, but we rule out a rate cut as it will send the wrong signal, put further strain on the FX rate, and stoke inflationary pressures. We do not expect a rate increase at the moment either, and we generally think the MPC will hold the rates until the war in Iran is resolved. Renewed hostilities in the Gulf could turn into a major drag for the economy and may even force the MPC to reverse the monetary easing cycle. The central bank has recently revised upwards its inflation forecasts for the medium term because of the conflict, as Egypt is vulnerable to supply line disruptions, gas imports, and investor sentiments. The CBE expects annual inflation to average 16-17% y/y in 2026 - thus exceeding the 7% +/- target for Q4 2026 - before moderating to 12-13% in 2027, and eventually moderating to single digits during H2 2027.

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Overall, despite more than two months of heightened uncertainty, Egypt appears relatively stable and should have the tools and resources to weather the current crisis, barring a dramatic escalation between the US and Iran. This is not the first time CBE is confronted with capital flight triggered by major external shock. In fact, this is the third such shock in a year, and CBE's track record has been robust. Importantly, the CBE has refrained from intervening in the FX market to shore up the pound - which lost 8% since Feb 28 - consistent with its commitment to a flexible FX regime and the broader policy framework agreed with the IMF.

Monetary Policy Committee Statement

Monetary Policy Review

Monetary Policy Committee Meeting Schedule

• Next MPC meeting: May 26, 2026
• Current policy rate: 6.25%
• EmergingMarketWatch forecast: Hold
• Rationale: MPC confirms wait-and-see stance, wants assurance of durability of strong forint

We expect that the MPC will keep the policy rate on hold in May after the MPC put a pause to the rate cuts in March and April. The MPC kept the base rate unchanged at 6.25% in April based on the increased inflationary risks due to the conflict in the Middle East. The decision was unanimous, NBH governor Mihaly Varga stated at the background discussion after the rate-setting meeting in April. The guidance was unchanged as the MPC signalled cautious and patient policy, depending on incoming macroeconomic data and financial market developments. Monetary conditions needed to remain tight due to the prevailing inflationary risks and positive real interest rates were called for in order to foster financial market stability and anchor inflation expectations, the MPC said. We think that the tone of the meeting was neutral, signalling that the MPC maintained the wait-and-see stance adopted in March as a response to the fallout from the Iranian conflict. The hike in global energy prices remained the main constraint to monetary policy, the meeting statement indicated, and we expect that the hold policy will continue as long as there is no permanent solution to the conflict. At the same time, NBH deputy governor Zoltan Kurali recently indicated that the strong forint might open room for policy easing. He stressed that the NBH would like to first see guarantees for the durability of the improvement in the forint and risk premia, adding that the decision will be based on the updated NBH forecasts coming with the June Inflation Report.

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Inflation expectations remained another constraining factor for monetary policy. The NBH noted some recent moderation of inflation expectations, possibly helped by the disinflationary trend, but they remained elevated. Keeping the forint stable was of key importance for anchoring inflation expectations, Varga highlighted. In this context, he expressed some cautious view towards the strengthening of the forint and the narrowing risk premium on Hungarian assets after the election result. The improvement was on the back of the prospects for swifter euro adoption and the unfreezing of the EU funds, he commented. The NBH would like to transfer the decline in the risk premium on domestic interest rates, but it first needed evidence on the durability of the reduction in the risk premium, Varga said. His statement also pointed towards wait-and-see stance of the NBH in the immediate months and the NBH will wait to see whether the pass-through from the stronger forint would be sufficient to offset the upward pressure from rising global energy prices, we interpret. He seemed to close the door on rate cuts, pointing out that the NBH was dependent on the monetary policy path of global central banks and that the ECB was preparing for hiking rates.

Otherwise, Varga highlighted that recent inflation developments were in line with the NBH expectations from its latest Inflation Report in March. The NBH expected that inflation will start to accelerate and to breach the 4% upper bound of the 1pp tolerance range around the mid-term inflation target in Q3. The inflation target will be met sustainably in H2/2027, it projected. During the background discussion, Varga also expressed implicit caution on the euro adoption plans of the upcoming Tisza government, saying that successful eurozone entry required substantial preparation beforehand based on the experience of other countries. At the same time, he highlighted several times that the decision for joining the eurozone was not the responsibility of the NBH, which we consider a signal that the NBH did not agree but would not be explicitly opposed to this process.

Post-meeting MPC statement from April rate-setting meeting

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

Minutes from April MPC rate meeting

Inflation Report - Q1/2026

MPC meeting calendar 2026

• Next MPC Meeting: June 3-5, 2026
• Current Policy Rate: 5.25%
• Last decision: Hold (April 8, 2026)
• Our forecast: Hold
• Rationale: Inflation remains contained, although risks are tilted to the upside. RBI to look through global energy supply shock in near-term to sustain growth momentum

We expect the Reserve Bank of India (RBI) to keep the repo rate unchanged at 5.25% at its upcoming June policy meeting. This would mark the third consecutive pause and would likely signal the end of the rate-cutting cycle, during which the RBI delivered cumulative cuts of 125bps between February and December 2025. While inflation has remained contained so far, it is expected to pick up as the government begins passing on the impact of elevated global oil prices to consumers. Higher fuel prices, coupled with rising input costs for producers, are also likely to generate second-round effects. Although this could risk de-anchoring inflation expectations, we believe the RBI may refrain from acting prematurely, as tighter policy could further hamper economic activity already strained by supply chain disruptions. This is particularly because the RBI views the recent rally in global oil prices as largely supply-driven that warrants a wait-and-watch approach.

At its March policy meeting, the central bank maintained a neutral stance, signalling flexibility amid heightened uncertainty stemming from the Middle East crisis, which it warned poses downside risks to growth and upside risks to inflation. Last week, RBI Governor Sanjay ​Malhotra hinted at monetary policy intervention if price pressures become entrenched. Inflationary pressures could intensify further if forecasts for below-normal monsoon rainfall materialize, disrupting crop output and driving up food prices. In such a scenario, especially if global oil prices remain elevated for an extended period, the RBI could be prompted to raise policy rates in the second half of 2026.

Inflation environment

CPI inflation rose to 3.48% y/y in April from 3.40% y/y in March, driven by higher food prices and rising dining-out costs following a sharp increase in commercial liquefied petroleum gas (LPG) prices. However, the uptick remained modest, largely reflecting stable petrol and diesel prices during the month. Last week, state-owned oil marketing companies (OMCs) raised fuel prices for the first time since the onset of the Iran war and implemented another increase this week, bringing the cumulative hikes to 4.2% for petrol and 4.4% for diesel. The move was widely anticipated amid mounting losses faced by fuel retailers, particularly after the conclusion of the state elections. The government typically discourages state-owned OMCs, which account for nearly 90% of the country's fuel stations, from revising pump prices in the run-up to elections. Analysts estimate that petrol and diesel prices may need to rise by a further 10%-15% to reach cost-recovery levels. As such, fuel prices are likely to continue increasing in the coming weeks, adding to inflationary pressures.

In April, the RBI projected CPI inflation to average 4.6% in FY27, accelerating sharply from an estimated 2.1% in FY26. Nevertheless, the forecast remains within the central bank's target range of 4% (+/-2%). Core inflation is projected at 4.4% for FY27. The RBI highlighted elevated energy costs and potential El Niño conditions as key upside risks to the inflation outlook.

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GDP growth

The RBI remains cautiously optimistic about growth, noting that the economy's underlying fundamentals are strong enough to withstand the current supply shock. Last month, the central bank projected growth to moderate from an estimated 7.6% in FY26 but still remaining robust at 6.9% in FY27. Domestic demand is expected to remain the primary driver of growth, supported by GST rationalization, improving business confidence, lower borrowing costs, and the government's higher capital expenditure outlay.

However, we believe this projection was based on a baseline scenario that assumed a relatively swift resolution of the Middle East crisis. A prolonged disruption to global supply chains, combined with rising fuel prices and tighter global financial conditions, could transform the supply shock into a broader demand-side slowdown, weighing on both private consumption and investment activity. Indeed, several high-frequency indicators, including fuel consumption and manufacturing output, have already begun to reflect the adverse impact of supply disruptions on economic activity.

External sector

The Middle East crisis is weighing on India's external sector, with higher global oil prices inflating import bills, while heightened global risk aversion has triggered portfolio outflows and added pressure on the rupee. Goods imports rose by 20.7% y/y to a six-month high of USD 71.9bn. Meanwhile, foreign investors withdrew a net USD 23.4bn from capital markets, primarily equities, between March 1 and May 20, including USD 13.6bn in March, marking the second-highest outflows in the country's history. As a result, the exchange rate has come under significant pressure, with the rupee depreciating more than 6% against the US dollar since the Iran war began in late February, hitting a record low. The RBI has intervened aggressively to support the currency, which has weighed on its foreign exchange reserves. As of May 8, reserves stood at USD 697.0bn, down from an all-time high of USD 728.5bn on February 27.

Last week, PM Narendra Modi urged citizens to reduce fuel and cooking oil consumption, defer gold purchases, shift to work-from-home arrangements, and avoid foreign travel to conserve foreign exchange. Subsequently, the government raised import tariffs on gold and silver and also restricted silver imports to curb outward flows. In FY26, India's gold and silver imports reached record levels of USD 72.0bn and USD 12.1bn, respectively, up 24.1% y/y and 149.6% y/y, likely driven by investment demand. Strong imports of the precious metals continued into April.

Overall, the current account deficit is expected to widen in FY27, primarily due to a deterioration in the goods trade balance as imports surge. Remittances remain robust for now but could come under pressure if the Iran conflict persists. In the first half (Apr-Sep) of FY26, the current account deficit stood at USD 30.1bn (1.0% of GDP), compared with USD 36.6bn (1.3% of GDP) in the same period last year.

Conclusion

While the Middle East crisis persists and risks to inflation have increased, we expect the RBI to remain on hold in June to avoid stifling growth through pre-emptive tightening. Most economists surveyed by Reuters last month expected rates to remain unchanged through 2027. However, if the crisis persists, the central bank may face a trade-off between containing inflation and supporting growth. Its decision to maintain a neutral stance signals an intent to retain flexibility, allowing it to adjust policy rates depending on evolving global conditions.

Further Readings

Minutes of MPC meeting

Monetary policy report

Governor's statement

• Next policy meeting: Jun 17-18
• Current policy rate: 5.25%
• Our forecast: Hold
• Last decision: Raise, 50bps (May 19-20)
• Rationale: BI surprised markets in May as expectations were for softer hike

Bank Indonesia will most likely keep the key rate on hold at its next policy meeting on Jun 17-18, in our view. The central bank will evaluate the impact of the larger-than-expected rate hike in May, before deciding on further monetary policy action.

We should note that the central bank surprised markets, with the consensus forecast pointing to a 25bp hike, hence we expect it to adopt a wait-and-see approach at least in May. However, BI has the habit of surprising markets, both in its easing and tightening cycles, hence we assign a 25-30% probability for another rate hike if the pressure on the rupiah persists.

The last decision suggests that BI is now more concerned with the exchange rate, rather than economic growth, as CPI inflation remains broadly within its target band. This is no surprise, given the government's ambitious public spending programme, which should support GDP growth on its own.

As a result, we think BI is becoming neutral-to-hawkish in light of the growing pressure on the rupiah. Further monetary policy decisions will largely depend on the pressure on the rupiah at least in the short term.

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GDP growth

GDP growth accelerated to 5.61% y/y in Q1 2026 from 5.39% y/y in Q4 2025. Government spending was by far the main factor behind the acceleration in GDP growth, while private consumption is also on a solid growth trend. The BI has maintained its GDP growth forecast at 4.9-5.7%, remaining on the optimistic side.

We should note that the government will continue to boost public spending H1 2026 to support GDP growth, extending further the trend that started in H2 2025. The measures include speeding up the free lunch programme (MBG), as well as rolling over the placement of IDR 200tn government funds from the surplus budget balance (previously kept with the central bank) into commercial banks in a bid to boost lending. On a related note, those funds, coming from the excess budget balance, could also be used as part of the government's bond buyback programme which aims to stabilise bond prices.

Exchange rate stability

The rupiah had depreciated by about 6.0% against the USD since the beginning of the year as of May 20, when BI hiked the key rate by 50bps. In May alone, the rupiah lost about 2.2% against the USD. After the rate hike, the rupiah regained some ground, though it returned to the downward trend, surpassing USD/IDR 17,850 at the time of writing, which brings its YTD depreciation to nearly 7%.

As a result, so far the BI's measures seem to have only marginal effect on the rupiah's exchange rate. We should note that apart from the rate hike, BI carries regularly its so-called triple intervention, which includes purchases on the spot FX market, domestic non-deliverable forwards (DNDF) and buying government bonds on the secondary market.

Concerns over the Fed's policy course have also diminished with pressure on the rupiah now the main topic. Still, should the Fed tighten monetary policy, this will exert further pressure on the Indonesian rupiah, possibly prompting BI to follow course.

Inflation environment

CPI inflation eased to 2.42% y/y in April from 3.48% y/y in March, returning to the midpoint of the BI's 2.5+/-1% target band. The spike in February was largely due to the base effect from the electricity tariff cuts for low-income households in Jan-Feb 2025.

Looking forward, the outlook for May also remains benign as the government kept subsidised fuel prices flat, carrying the burden from the oil price spike. Core inflation also remains well within the BI's target band. The central bank expressed confidence that CPI inflation will remain under control and within the target band in 2026.

As a result, we think CPI inflation has largely taken a backseat in Bank Indonesia's monetary policy meetings.

Conclusion

Looking forward, we expect BI to remain vigilant about the mounting pressure on the rupiah. We think it will keep the key rate on hold in May at this point, though if it wants to surprise markets, it could go for another rate hike. We see this chance at roughly 25-30%.

Further reading

Last MPC press release

Calendar of MPC meetings

• Next MPC meeting: June 25
• Current policy rate: 6.50%
• EmergingMarketWatch forecast: Hold

The board was clear that the May 25bps cut was the last of the easing cycle in the latest minute. This was unsurprising considering the latest cut had said this much. However, it's notable to see the board so clearly anticipate no further easing ahead considering the dovish comments of some board members, including Deputy Governor Omar Mejía, who insists the Monetary Policy Rate (MPR) remains restrictive at 6.50%.

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To be clear, the board is not clearly saying how long the policy rate will stand at 6.50%. Thus, while it might make sense to anticipate stability through the rest of 2026, we believe the market should not be too certain about this and, more so, should not anticipate stability through 2027.

Lingering CPI inflation pressure and loosely anchored mid-term expectations should be enough to avoid a new policy rate cut. However, the CB's board has been clear to show this is secondary to its dovish commitment, with the bulk of the board already cutting the policy rate into neutral territory despite high core inflation and no analyst anticipating convergence towards the CB's target.

Thus, weak economic growth, as we've seen so far in 2026, could have the CB cut its policy rate much earlier than anticipated, in our view, even if only by 25bps. On the other hand, the expectation of relative economic recovery in Q2 should help delay any such dovish whim, in our view, securing no cut before mid-Q3 at the earliest.

Any such cut would come to weaken the CB's inflation targeting credibility further, in our view. We note CPI inflation slowed to 4.45% y/y in April, still up since 2025-end and adding a quarter above 4.00%. Further, core CPI inflation, which should drive the CB's monetary policy actions, added 12 months above 4.00% in April, showing no clear deceleration trend, with service inflation actually accelerating to post its worst result since mid-2025.

Indeed, the consensus remains for CPI inflation to close the year at 4.38% y/y, with analysts lifting the consensus by 0.50pps so far in the year, in part pressured up by concerns regarding the Middle East conflict. Indeed, the latest minute shows all board members are considering the war in Iran when making their monetary policy arguments; however, they've minimized the impact on CPI inflation in Mexico because of the government's subsidy of regular fuel. This strategy certainly prevents much contagion.

Currently, the CB predicts CPI inflation will end 2026 at 3.5%, to stand at 3.0% since Q2 2027. This is simply off from the market's expectation and, again, weakens the CB's credibility, in our view.

We warn that the CB's credibility may be weakened further as Deputy Governor Jonathan Heath, the lone hawk in the board, is set to leave at the turn of the year. We believe the appointment to be made by President Claudia Sheinbaum will be crucial in rebuilding part of the CB's credibility or in weakening it further, as we expect the appointment of someone respected, probably from within the bank's lines. Someone from the private sector, like Heath, would be welcomed, as the new member could try to bring a differing voice from the dovish majority, as Heath has.

Overall, we expect the board will hold the policy rate at 6.50% through the rest of the year, hoping for CPI inflation to slow while it does so. We assume the dovish majority would like to clip the policy rate further in 2027; however, it remains to be seen if they'll do so even if CPI inflation, as expected, shows no clear convergence towards the CB's 3.00% target. Indeed, late 2026 comments and the pace of CPI inflation to close the year might increase the chances of easing next year. Currently, the market expects monetary policy stability through the rest of 2026 and through 2027, something that might not be recognizing how dovish the board is.

• Next MPC meeting: 20 - 21 July
• Current policy rate: 26.5%
• EmergingMarketWatch May forecast: 26.5%

The MPC decided to maintain the benchmark interest rate at 26.5% on Wednesday (May 20), during the committee's second meetings of the year. This follows a 50bps cut at the February meeting and a hold decision in November 2025. Economists generally expected the committee to hold the rate this week, given the recent rises in headline inflation caused by the Middle East war. This latest meeting follows two consecutive months of higher inflation where the headline rate increased modestly from 15.1% y/y in February to 15.4% in March and 15.7% in April. This reversed the disinflationary path the country had been on for the 11 months before March. Food prices in particular have been under pressure with a rise from 8.9% y/y in January to 16.1% in April.

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Speaking at a briefing after the MPC meeting, CBN governor Olayemi Cardoso said MPC members unanimously agreed to keep the benchmark rate unchanged. Eleven out of twelve members were in attendance. Cardoso said their decision was prompted by concerns over global economic shocks, including uncertainties linked to developments in the United States and the ongoing conflict in the Middle East.

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Alongside the rate hold, the CBN retained other key monetary parameters, signalling a continued cautious stance on inflation management. The committee maintained the cash reserve ratio (CRR) at 45% for commercial banks and 16% for merchant banks, while retaining the 75% CRR on non-TSA public sector deposits. In addition, the liquidity ratio was left unchanged at 30% and the standing facilities corridor was kept at +50/-450 basis points around the MPR.

In summary, the MPC voted to:

• Maintain the main policy rate at 26.5%
• Retain the standing facilities corridor at +50/-450 around the MPR
• Keep the CRR at 45%
• Retain the Liquidity Ratio at 30%

Monetary Policy Committee Statement

Monetary Policy Committee Meeting Schedule

• Next policy meeting: 15 June, 2026
• Current policy rate: 11.50%
• Last decision: 100bps hike (April 27, 2026)
• Our forecast: Increase by 50-100bps
• Rationale: Inflation is expected to accelerate and stay above the target range in near term

The State Bank of Pakistan (SBP) raised the policy rate by 100bps in its April meeting, surprising the market that had largely expected no change or a smaller hike. Only one economist in each of the Bloomberg and Reuters surveys had anticipated the move. The decision is justified and underscores the central bank's effort to stay ahead of the curve. The Middle East conflict has fuelled energy inflation, and if prolonged, it risks triggering second-round effects and de-anchoring inflation expectations. The SBP noted that the crisis has intensified risks to the macroeconomic outlook, particularly inflation, which is projected to remain above the 5-7% target range in the coming quarters.

The larger-than-expected hike, therefore, shows that the central bank is taking a proactive stance to safeguard the hard-won gains in price and external stability under the IMF-supported reform programme. The move may also serve as a signal to the IMF, which last month urged the SBP to remain ready to tighten monetary policy further if price pressures intensify or inflation expectations rise. The IMF Executive Board is scheduled to meet on May 8 to review and likely approve the disbursement of USD 1.2bn under its two loan programmes.

The SBP appeared less worried about the external sector on account of robust remittances and loan inflows, although the impact of the global energy supply shock has yet to fully feed into trade data. Meanwhile, the crisis is expected to weigh on economic activity. However, the latest rate hike indicates that the central bank's primary objective of price stability takes precedence over growth concerns.

Inflation environment

CPI inflation accelerated to 7.3% y/y in March from 7.0% y/y in February. The print was the highest since August 2024, driven mainly by a surge in the cost of motor fuel, electricity, piped gas, liquefied petroleum gas, and jewellery. Core inflation also edged up, rising to 7.4% and 8.4% in urban and rural areas, respectively - the fastest pace in five months - in part because of higher transport fares amid costly pump prices. Inflation is expected to quicken further in April after the government earlier this month withdrew fuel subsidies that had cost it PKR 129bn in March. As of April 29, prices of petrol and high-speed diesel stand 47.8% and 35.4% above pre-war levels, respectively. Meanwhile, the latest SBP survey shows that households' inflation expectations deteriorated sharply in April, reaching a seven-month high.

The SBP projected the global energy supply shock to push inflation into double digits in the coming months. Stable food prices amid ample supply are likely to provide some offset. Nevertheless, inflation is seen staying above the upper bound of the target range of 5%-7% during Q4 (Apr-Jun) of FY26 as well as for most of the next fiscal year.

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GDP growth

GDP growth clocked in at 3.8% y/y in the first half (Jul-Dec) of FY26, rebounding from 1.9% in the same period last year, driven by strong services and manufacturing activity while the agriculture sector weakened due to persistent decline in crop output. High-frequency indicators, including large-scale manufacturing output, vehicle sales, local cement dispatches, electricity generation, and fuel consumption, suggest that this momentum continued into the first two months of the year. However, signs of slowdown emerged in March, according to the SBP, as higher fuel prices and the early closure of businesses under government energy conservation measures likely weighed on domestic demand. The impact is expected to be more pronounced in the April-June quarter following the withdrawal of fuel subsidies.

In addition, lower-than-expected wheat production has further clouded growth prospects in the agriculture sector, the central bank noted. As a result, the SBP now expects GDP growth to come in closer to the lower end of its earlier projected range of 3.75%-4.75% for FY26. Even so, this remains more optimistic than the IMF's and World Bank's projections of 3.6% and 3.0%, respectively.

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External sector

The current account remained positive for the third consecutive month in March, posting a sizeable USD 1.1bn surplus, the highest in a year. The improvement was supported by resilient workers' remittances and a decline in crude oil and petroleum products imports, as higher global prices were offset by lower volumes due to supply disruption from the Middle East amid the closure of the Strait of Hormuz. Although the SBP noted that the impact of higher global energy prices, freight charges, and insurance premiums has yet to fully appear in economic indicators, the favourable Q3 (Jan-Mar) data prompted a more optimistic outlook on the external account. The current account is now expected to settle near the lower end of the SBP's earlier projected range of 0%-1% of GDP for FY26. In the first three quarters (Jul-Mar), the current account remained broadly balanced.

On the financing side, the SBP praised the government's USD 750mn Eurobond issuance and the securing of an additional USD 3bn in deposits from Saudi Arabia. These inflows helped cushion the impact of the unexpected USD 3.45bn debt repayment to the UAE on the central bank's foreign exchange reserves. The reserves are expected to rise above USD 18bn by end-June, up from USD 15.8bn as of April 24.

In his post-policy press conference, SBP Governor Jameel Ahmad said that debt repayments during May-June are estimated at USD 4.2bn, of which USD 2.7bn (likely Chinese commercial loans) is expected to be rolled over. Overall, he added that FY26 repayments total USD 25.4bn, of which USD 21.2bn has already been settled or rolled over.

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Way Forward

All in all, we believe the April rate hike was not a one-off event and that the SBP is likely to tighten monetary policy further. The central bank, as well as the IMF, emphasises the need to keep real interest rates "adequately positive," which, in our view, could drive another 150-200bps increase in the policy rate. That said, much will depend on the intensity and duration of the Iran conflict. An early resolution and a subsequent decline in global oil prices could render this outlook less relevant.

• Next monetary policy meeting: Jun 18
• Current policy rate: 4.5%
• EmergingMarketWatch forecast: Hike by 25bps or 50bps
• Rationale: CPI for April; lending growth for March; peso weakness; GDP data for Q1

We think that BSP's Monetary Board (MB) will likely raise the policy interest rate by 25bps or 50bps in its meeting on Jun 18. Last month, the MB decided to increase the BSP's Target Reverse Repurchase (RRP) Rate by 25bps to 4.5%. This was the first increase in the rate since Oct 2023. The MB also considered a hike by 50bps and the final decision was a "close vote", BSP Governor Eli Remolona Jr. said.

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There have been a number of important data releases since the previous Central Bank Watch. Annual CPI inflation accelerated sharply in April and is already significantly above the 3±1% target. This is the main argument supporting our expectation of a rate hike next month. In addition, bank lending growth has been solid and returned to a double-digit territory in March. A third argument is the weakness of the peso against the US dollar.

On the other hand, the lower-than-expected GDP growth in Q1 seems to weaken the case for a continued monetary tightening. However, the BSP has said that it is committed to fulfilling its primary mandate of slow inflation.

Inflation

CPI inflation accelerated to 7.2% y/y in April from 4.1% y/y in March due to the effects of higher international fuel prices on food and energy costs. The latest reading is the highest since Mar 2023. The CPI rose by 3.9% y/y in Jan-Apr. Annual core inflation was 3.9% in April, speeding up from 3.2% in March. The seasonally adjusted CPI increased by 3.0% m/m in April, after rising by 1.6% m/m in March.

The CPI inflation in April is above BSP's month-ahead forecast range of 5.6-6.4% y/y. The central bank issued a press release, in which it said it is committed to fulfilling its primary mandate of slow inflation and is ready to take actions needed to ensure that inflation returns to its 3% target within a reasonable timeframe.

Economic growth

The GDP increased by 2.8% y/y in Q1, decelerating from 3.0% y/y growth in Q4 2025. The latest reading was below the 3.5% forecast in a Reuters poll, the 3.3% estimate in a Bloomberg poll, as well as the 3.4% median forecast of a BusinessWorld poll. It is also the weakest growth since Q1 2021, when GDP fell by 3.8% y/y. In seasonally adjusted terms, the GDP increased by 0.9% q/q in Q1, after rising by 0.6% q/q in Q4 2025.

Agriculture, forestry and fishing edged down 0.2% y/y in Q1, reversing a 1.0% y/y increase in Q4. The y/y decline in industry narrowed to 0.1% in Q1 from 0.3% in Q4. The latest contraction was driven by construction, which fell by 2.8% y/y. General government construction dropped by 31.5% y/y in Q1, improving somewhat from a 38.6% y/y decline in Q4 2025. Mining, manufacturing and utilities all registered positive y/y growth in Q1, of 3.8%, 0.5% and 0.7%, respectively. Meanwhile, services rose by 4.5% y/y in Q1, decelerating from 4.9% y/y growth in Q4 2025.

The Philippine government targets real GDP growth of 5.0-6.0% in 2026 and 5.5-6.5% in 2027. However, it is likely that the target for this year will be revised down soon.

LFS, lending

The unemployment rate decreased to 5.0% in March from 5.1% in February, but was higher than 3.9% in Mar 2025, according to the results of the latest labour force survey (LFS) announced by the statistics office. In the y/y comparison, the number of unemployed rose by 33.4% to 2.58mn in March. The number of employed climbed 2.2% y/y to 49.07mn. The labour force hence increased by 3.4% y/y to 51.65mn.

Outstanding loans of universal and commercial banks, net of reverse repurchase (RRP) placements with the BSP, rose by 10.7% y/y at end-March, speeding up from revised 9.6% y/y growth at end-February. On a seasonally adjusted basis, loans increased by 1.7% m/m at end-March.

The banks expect to keep their credit standards for enterprises and households steady in Q2 under the modal method, according to the results of the Q1 Senior Bank Loan Officers' Survey (SLOS) conducted by the BSP. The diffusion index method showed expected net tightening.

Exchange rate

The peso is trading at USD/PHP 61.399 at the time of writing, which compares with USD/PHP 60.498 on Apr 23, the date of the latest MB meeting.

The weakness of the Philippine currency is an important argument supporting our expectation of continued monetary tightening.

Further reading

Press release after Apr 23 monetary policy action

Schedule of monetary policy meetings

Highlights of MB meetings on monetary policy

Monetary Policy Report

• Next MPC meeting: Jun 1-2, 2026
• Current policy rate: 3.75%
• EmergingMarketWatch forecast: 3.75%

Rationale: The Monetary Policy Council is worried about the impact of the conflict in the Middle East and most members do now say that the next move is much likelier to be a hike rather than a cut. That is a sharply different scenario than seen in February, which was before the US and Israel decided to attack Iran and when more cuts were expected. But whether or when the council will hike remains an open question. Most members say that the update of the CPI and GDP projections in July will provide key detail about how the outlook has changed, and that should provide some grounds to give greater guidance of the likely rate path.

Still, MPC members love to talk about the importance of updated inflation projections until the projection is actually released, when it becomes 'one input among many.' Thus, we definitely do not rule out a scenario where the July projection points in a certain direction, but the MPC might then downplay it. That is especially so for the July projections since they are followed by the August holiday and that means there is usually about two months before the next policy sitting in September. Considering the scale of uncertainty out there, and that might still be around regarding the Middle East, the MPC is likely to be cautious.

MPC members have tended to say that the external supply shock triggered by the war in Iran is not as big as that seen after Russia invaded Ukraine in Q1 2022 for several reasons. Some members, including NBP and MPC chair Adam Glapinski, have also talked a lot about the downside hit to the economy due to the war. Taken together, such comments can be read as suggesting the MPC believes it has time before it might have to raise interest rates. It also makes it likelier that the MPC might just decide to weather the storm and keep rates more or less where they are, hoping that the inflation picture will return to a benign one in 2027 and subsequent years.

Still, as Glapinski has emphasised, the MPC will hike if the data underscore such a need. Such a need will likely be delineated if headline CPI inflation tops the 3.5% y/y top end of the +/-1-pp band around the 2.5% inflation target, but also core inflation shows signs of acceleration and there are other signs of pass-through from higher fuel prices. If wage growth were to quicken, then that would likely increase the likelihood of tightening.

Overall, in the end, we believe the MPC will hold fire in June and likely in July as well. Interest rates might, however, be hiked from September, but perhaps more likely in Q4. But the MPC will remain data dependent and won't hike unless there are signs of second-round effects or other pressure. Still, one can definitely not rule out hikes later this year, and that marks quite a contrast from an early-year picture in which the outlook might have even seen the key rate approach the low 3% level.

MPC's post-sitting statements

Latest council minutes

Latest NBP inflation report (March 2026)

Most recent MPC voting results

Archived video of all MPC press conference

• Next MPC meeting: Jun 10, 2026
• Current policy rate: 37.0%
• EmergingMarketWatch forecast: Hold
• Rationale: Expected May inflation slowdown and supply-side war shocks support patience rather than another rate hike given CBT's playbook

We expect the CBT to leave its policy rate unchanged at 37.0% at the forthcoming MPC meeting and to return to one-week repo funding, after having suspended those auctions following the outbreak of the Iran war. We note that the next MPC meeting will be held on Jun 10, leaving ample room for incoming evidence to shape the policy debate, including May inflation, early June price indicators, the course of the Iran war and its impact on oil, risk appetite and domestic financial conditions. Should these inputs materially alter our policy assessment, we will revise our expectation accordingly.

Our latest inflation model set gives an early signal of 1.4% m/m for the May inflation, with a 1.1-1.7% range. In May, we expect significant price declines in fruits and vegetables, supported by favourable weather conditions in Turkey, and some easing in energy-related items as Iran war pressure on prices moderated. We note that these components, together with one-off natural gas and electricity tariff hikes and bread price increases, were among the main drivers of the April inflation surprise. Against this backdrop, we expect some relief in the m/m print in May. Still, the 10-day Eid al-Adha holiday poses upside risks, particularly through transportation prices, we underline.

Data Download

As of today, real export and real import figures were released, showing that the margin between export and import volumes narrowed significantly. This was already something we have been observing for several months, as real exports contracted sharply for eight consecutive months, while the Iran war appears to have deepened the strain further. We do not expect this imbalance to correct quickly. The CBT's exchange-rate policy, which keeps the lira relatively valued in order to contain inflationary pass-through and preserve carry-trade incentives, has increasingly started to weigh on external competitiveness. Yet this policy also cannot be easily abandoned, as a faster FX adjustment would risk reviving inflation expectations, weakening the disinflation narrative and forcing the CBT into an even tighter policy stance. This leaves the CBT in an increasingly difficult position, in our view.

We will closely follow tomorrow's inflation report for clearer guidance. We expect the CBT to deliver a meaningful upward repair to its 2026 forecast corridor, but we would not treat a single mid-year adjustment as sufficient. In our view, the more important issue will be whether the CBT presents a credible path that recognises sticky services inflation, administered-price pressure, weaker external balances and the limits of the exchange-rate anchor under renewed geopolitical stress. This matters even more because the inflation pressure following the Iran war appears largely supply-side in nature, driven by energy, transport, logistics and imported input costs, where monetary policy alone can only offer partial relief, we underline. Without a more realistic forecast path and a consistent policy reaction function, the gap between the CBT's official projections and market expectations could remain wide, leaving the disinflation story dependent more on tight financial conditions than on restored confidence, we assess.

Summary of April rate-setting meeting

MPC rate decision in April

Quarterly Inflation Report for Q1

Monetary policy strategy for 2026

• Next MPC meeting: June 16, 2026
• Current policy rate: 4.50%
• EmergingMarketWatch forecast: 4.50%

The BCCh's Monetary Policy Council (MPC) voted unanimously to keep its benchmark interest rate unchanged at 4.50%, in line with consensus, according to the post-sitting statement for the Apr 28 meeting. However, the MPC surprised by noting that short-term inflation projections have risen due to developments in the Middle East proving more adverse than expected at the last policy meeting, and that it will be particularly attentive to factors that could lead to greater transmission or persistence of inflation. While the MPC maintained that the future path of the monetary policy rate will be assessed meeting by meeting depending on how events unfold, just like it said in March, the prior comments hint at a higher chance of a rate hike in the short-term than was considered in consensus polls and market prices.

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In what follows, we summarize the post-sitting statement in the order in which it was presented.

External developments - The international outlook remains marked by uncertainty surrounding the war in the Middle East. Oil price futures still point to a decline, but the prolongation of the conflict has increased the risk that prices will remain elevated. For now, the main effects are concentrated in observed inflation and its projections, which has reinforced caution among central banks. On the activity side, the outlook shows no major changes, although with differences across regions.

Financial - Global financial markets have posted a favorable performance due to the perception that the global economy will remain resilient. In most economies, including Chile, equity markets have recovered and currencies have appreciated against the US dollar. As for commodities, oil prices have stood above the levels projected in the March Monetary Policy Report. Meanwhile, copper prices have increased, standing at around USD 6 per pound.

Real economy - The economic activity reading for February was worse than the central bank projected, mainly explained by supply-side factors linked to natural resources. Regarding spending, high-frequency indicators for Q1 suggest that private consumption performed in line with expectations, while gross fixed capital formation slowed somewhat more than anticipated, particularly in its machinery and equipment component. Still, investment plan trackers reported a significant increase in the volume of investment projects for the 2026-2029 period. In the labor market, the unemployment rate showed no change and job creation remained limited.

Inflation - The CPI inflation reading of 2.8% y/y for March was above the BCCh's expectations due to a larger increase in volatile prices excluding energy. Core inflation of 3.4% y/y was as expected. Consensus polls had expected inflation two years ahead at 3.0%-3.2%.

Guidance - Developments in the Middle East have been more adverse than anticipated in the central scenario of the March monetary policy report, increasing the probability of more negative outcomes for inflation and global activity. Domestically, short-term inflation projections have risen. The MPC will be particularly attentive to factors that could lead to greater transmission and/or persistence of inflation.

(The following paragraph is 100% unchanged from the March post-sitting statement)
The macroeconomic scenario remains subject to a higher-than-usual degree of uncertainty. Therefore, the MPC considers that continuous assessment of alternative scenarios will be necessary, in which the response of the global and local economy may generate inflationary pressures different from those expected and require changes in monetary policy. Accordingly, the future path of the MPR will be assessed meeting by meeting, depending on how events unfold. The MPC reaffirms that it will take the necessary decisions to ensure that projected inflation stands at 3% over a two-year horizon.

• Next board meeting: June 30, 2026
• Current policy rate: 11.25%
• EMW forecast: 11.75% to 12.25%
• Rationale: With the Council of State temporarily suspending the rule requiring FinMin physical attendance, the board can now set rates without his presence. The real policy rate has fallen to 4.85% so far in May from a 5.1% peak in April, with at least a 50-bp hike needed to prevent further erosion of the real rate buffer. Inflation pressures persist, with food inflation seen near 7.8% y/y by year-end and headline near 5.9%-6.0% y/y in the May print. The policy rate is seen rising 50-100 bps, with market break-evens pointing higher even as the financial system survey holds steady at 5.7%.

BanRep would have no choice but to raise its policy rate at its next meeting on June 30. The size of the increase remains uncertain, and by that date, the country will already have elected a new president in what is expected to be a closely contested race compared with recent elections. Crucially, it was announced yesterday that the Council of State, with the support of the central bank, temporarily suspended the clause in BanRep's statutes requiring the physical presence of the finance minister to convene, deliberate, and vote [our story here]. This clears a major procedural hurdle: even if Finance Minister Germán Ávila chooses not to attend, the board can secure a quorum, empowering the hawkish majority (governor Leonardo Villar, Olga Acosta, Bibiana Taboada, and Mauricio Villamizar) to push forward with their frontloading strategy. With that obstacle removed, the question shifts to sizing.

This hawkish tilt is anchored in the central bank's focus on inflation expectations. Under its targeting framework, BanRep monitors the ex-ante real policy rate, the nominal rate minus average inflation expectations, as the primary gauge of monetary restrictiveness. Recently, rising expectations have passively loosened real conditions. To counter this, the board raised nominal rates by 200bps in two steps since January, recovering real rate territory lost after minimum wage-driven expectations overshot at the start of the year. A higher nominal rate, even if it translates into steeper borrowing costs and slower economic activity, is required to prevent the real rate from eroding, keeping monetary policy restrictive enough to force inflation toward the 3% target.

Our calculations suggest that the average real rate peaked at 5.1% in April but slipped to 4.85% so far in May (the average of two real-rate measures: 5.55% against the financial system survey and 4.15% against TES break-even inflation). With the policy rate at 11.25%, a 25-bp hike would merely offset this recent drop. However, following the unexpected decision to hold rates at the Apr 30 meeting, defying our expectation and the market consensus of a 75-bp hike, a 50-bp adjustment is likely on the table to rebuild a hawkish buffer against sticky prices. According to the latest CPI inflation report by DANE, headline inflation at 5.79% y/y, which the market now expects to rise to around 5.9% y/y this month, is being driven by hotels and restaurants (1.1pps), food and non-alcoholic beverages (1.3pps), and housing-related utilities. The index is showing clear second-round effects: the minimum wage increase is feeding into core services, including dining out and private security (a necessity good for condominiums in urban areas). While direct supply shocks from energy prices and an El Niño event threaten headline food inflation (projected near 7.8% y/y by year-end), in our view, the greater risk for BanRep is how these shocks could further de-anchor expectations. Adding to this, BanRep's year-end inflation forecast of 6.4% y/y now looks set to be exceeded, with the market consensus at 6.45% y/y.

Overall, this backdrop easily accommodates an increase of at least 50 bp. In fact, there is room for a hike of up to 100bps if one considers that the real rate is currently much lower, closer to 4.15%, when measured against one-year market-implied inflation from TES break-evens. Notably, the central bank's own survey showed the median one-year inflation expectation holding steady at 5.7%. Given the deteriorating inflation backdrop and mounting supply shocks, one would have expected this forward-looking metric to drift higher, making its flatness at current levels a notable anomaly.

• Current policy rate: 3.75%
• Next monetary policy meeting: Jul 7, 2026
• Expected decision: On-hold

The MPC cut the policy rate by 25bps to 3.75% on May 25 but maintained a rather hawkish tone, which was interpreted by some as a defence why it did not implement a steeper easing. The press release and comments of BoI officials after the announcement stressed on still existing risks and deputy governor Andrew Abir insisted that the geopolitical uncertainties required a gradual monetary easing. Before the rate decision sitting Abir commented that the research department assumption for two rate cuts by March 2027 (one more apart from the May 25 cut) is still valid and after the meeting BoI governor Amir Yaron confirmed that the new forecast (to be announced in July) would not be much different. However, we believe that in case current conditions do not change materially or the security situation improves, the monetary easing might eventually be larger. Yaron warned though that conditions might change very fast and assessed that the MPC is not on a path pointing to a definite monetary easing.

Data Download

Inflation stabilised at 1.9% y/y in April remaining at the mid-point of the 1-3% target range for the fourth consecutive month and within the band ever since August. Inflation surprised positively for the second consecutive month in April and both Yaron and Abir confirmed that this was the main factor backing the rate cut. The developments took place at the backdrop of a sharp shekel appreciation that seems to have offset the effects of the higher oil prices, which full impact was expected to be first seen in the April prints. The press release says that inflation is to increase in the coming months but to remain around the mid-point of the target and Abir later on commented that inflation was not expected to exceed the upper end of the target (3%) even in case of a shock.

GDP declined by 3.3% in saar terms (seasonally-adjusted annualised rate) in Q1, which is higher than the expectations of the finance ministry from end-March (2.5% saar decline) but the BoI said it was lower than expected and lower than the economic contraction in Q2 2025 when the previous war with Iran took place. GDP level was by about 4.5% lower than its long-term trend would indicate, the BoI assessed. A recovery has already started in Q2 with credit card purchases recovering and slightly exceeding their long-term trend line, stability in exports and recovery starting in imports as of April, according to the BoI. Credit continued expanding, the risk premium declined close to pre-Oct 7 2023 levels, and equity indices continued increasing. The labour market was impacted significantly by the war but has already started recovering slightly. Thus, the economy does not seem to need support by rate cuts and the major determinant will remain inflation and the security situation, in our opinion. Yaron ruled out intervention on the forex market for now urging the government to aid exporters instead and Abir suggested that this might happen once inflation approaches 1%.

Board statements, press briefings, minutes from MPC meetings

Calendar of MPC meetings

Latest BoI macroeconomic forecasts

Monetary policy reports

Bank of Israel Law

The Monetary Committee

• Current policy rate: 18%
• Next monetary policy meeting: Jun 5
• Expected decision: hold
  

We still think the NBK is more likely to lean toward an on-hold decision in June. At the same time, we note that inflation dynamics signalled further moderation in April, with the CPI rate dropping to 10.6% y/y (from 11% y/y). While positive, the result is somewhat above expectations. In late April, NBK governor Suleimenov had stated inflation was expected at 10%-10.5% y/y. He later added it could be 'slightly higher.' In addition, April's core inflation and seasonally adjusted inflation outcomes were deemed 'elevated' by the bank and it expressed concern about persisting inflationary tendencies in the economy.

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The easing of households' inflation expectations (12.4%) is positive, as is the tenge's relatively long-lasting stabilisation. In general, however, we do not see a consistent / linear disinflation trend yet. Non-food inflation was higher in April, while the moderation in services is susceptible to near-term pressures after the moratorium on tariff hikes was lifted. April already saw localised hikes in some sectors and we expect more similar decisions in the upcoming quarter. We also remind that the fiscal stimulus gains pace in H2 due to state programmes and spending on infrastructure.

Overall, it should be noted that local financial analysts increasingly demonstrate optimism about an immediate rate cut in June. The central bank has not necessarily dismissed this, but its recent dovish rhetoric has still sounded rather cautious as a whole. In previous comments, governor Suleimenov did state the NBK would only begin an easing cycle in H2. More recent official statements stressed that price stabilisation has not been achieved yet, not justifying immediate easing either.

In this context, we view an on-hold decision as a more likely prospect, since it would align with the bank's focus on sustainable convergence. In case of an immediate cut, the justifying factors will likely gravitate around the need to preserve a growth momentum. The external window is favourable as well, which may tempt the bank into a small step to avoid sharper cuts later in the year.

• Next policy meeting: July 16
• Current policy stance: 2.50%
• Last decision: May 28 (Hold)
  

The Bank of Korea is likely to keep interest rates unchanged at the next policy meeting on 27-28 May, but the bias has now shifted in a definitively hawkish direction, in our view. The comments of the Monetary policy board members at the last meeting on April 10 showed a hawkish turn, in our view, with only 1 out of 6 members being slightly dovish, while 3 out of 6 were hawkish in their tone. Since then even more hawkish indications have accumulated.

Data Download

Parliament confirmed Shin Hyun-song as the new BOK governor, and he has been know to make hawkish comments in the past, specifically saying that when growth and inflation conflict, price stability takes precedence. BOK Senior Deputy Governor Ryoo Sang-dai also signalled that with growth near or above 2% and inflation likely to continue trending upwards it may be "time to think about" raising rates. Later in May, the outgoing BOK board member Shin Seong-hwan, who was known are one of the most dovish members, made quite hawkish comments, saying that it is now "burdensome" to even discuss rate cuts. His replacement, Kim Jin-ill, also stroke a hawkish tone in his first public comments.

Higher growth and higher inflation estimates point in only one direction

We note that major institutions are raising their estimates for GDP growth in 2026, which is weakening the dovish argument. The Korea Development Institute (KDI), sharply upgraded its GDP growth forecast to 2.5% last week, up from 1.9% previously. Finance Minister Koo Yun-cheol also recently said that GDP growth will be comfortably above 2% in 2026 and many international investment banks such as JP Morgan, along with the Hyundai Research Institute now expect GDP growth in the 2.5-3.0% range. This upward revision in growth projections significantly changes the context of the monetary policy discussion, as muted growth was previously a primary concern and a leading argument for the more dovish members of the BOK. Now, with short-term growth outlook seemingly much more favourable, it is very hard to justify any rate cuts, in our view, given the rise in CPI inflation.

The GDP data for Q1 showed very strong 1.7% q/q and 3.6% y/y growth, the highest since 2021. Net exports surged by 24.5% y/y, after rising by 8.85% y/y in Q4 2025. Meanwhile, the latest CPI release showed that inflation accelerated to 2.6% y/y in April, from 2.2% y/y in March. Core inflation remains relatively stable, with the inflationary surge currently contained mostly to transport. However, we think inflationary pressures are likely to broaden if energy commodity prices stay higher for longer and if semiconductor-led growth is sustained for the remainder of the year.

The outlook remains highly uncertain, with crude oil prices staying well above USD 100 per barrel and with no clear resolution of the Middle East crisis in sight. We think the severe disruption of commodity flows through the Strait of Hormuz will cause re-routing, diversification and increased spare capacity by all interested parties in the medium-to-long term, but this will take time and is in itself pro-inflationary.

Other factors also point in hawkish direction

We note that bond markets are also pointing in a hawkish direction, as yields on KTBs are rising all across the yield curve. This is part of a broader global trend in bond yields over the recent yields, which in our view reflects rising inflation expectations globally. This shift is pushing other central banks in a more hawkish direction as well, with the market now pricing a 50% chance of a rate hike by the US' Federal Reserve in 2026, instead of rate cuts, as was the baseline expectation at the start of the year. A hawkish shift by the Fed would add even more pressure to an already very weak Korean won, with the exchange rate again climbing above 1,500, as of May 20. The won's weakness, even in the context of a record external surplus is another factor that we think will influence the BOK in a more hawkish direction.

All of these factors make a hawkish shift highly likely, in our view, and in the past few days reports have emerged that 1-2 members of the Monetary Policy Committee could possibly dissent and vote for a rate hike on May 28. This was suggested by Citibank economist Kim Jin-wook to local media on May 19. It's not out base case, but we are not ruling it out either. At any rate, what's more relevant is the future monetary policy outlook. We think the dot plot introduced in February will likely be updated to reflect a higher expected base interest rate. Currently, the six-month dot plot projects an unchanged 2.5% base rate, but we think this is likely to be revised upwards by 0.25-0.5pps even though an immediate rate hike is unlikely.

Conclusion

We do not expect the central bank to raise rates on May 28, but the forward guidance will most likely shift in a hawkish direction. At the previous BOK board meeting 4 out of 6 members specifically spoke about inflation risks and uncertainties as a primary concern at the moment. The importance of clearly communicating the priority of price stability, in order to control inflation expectations, was emphasised by one of the members. Since then, clearly hawkish public comments were made by the outgoing board member Shin Seong-hwan, by his replacement Kim Jin-ill, and by Senior Deputy Governor Ryoo Sang-dai.

Structurally, the developing macroeconomic situation is also clearly pushing the BOK into a more hawkish stance. Inflation is accelerating, and the outlook remains highly uncertain, with oil prices staying above USD 100 and the won being very weak against the US dollar. Meanwhile, GDP growth is accelerating, and the overall growth outlook has significantly improved, at least until end-2026, thanks to the boom in semiconductor exports. We think that although the central bank is likely to maintain a "wait and see" stance for the meeting next week, the six-month forward-looking dot-plot is likely to be updated to reflect a base interest rate 0.25-0.5pps above the current 2.5%.

• Next policy meeting: July 9, 2026
• Current policy rate: 2.75%
• Our forecast: Hold
• Last decision: Hold (May 7, 2026)
• Rationale: BNM unlikely to be pressured enough by inflation to raise rates in Q3

The BNM is unlikely to tighten policy despite the fact that inflation has accelerated slightly in March-April as a consequence of the rising international oil prices, in our view. Inflation hit an 18-month high of 1.9% y/y in April, up from 1.4% y/y before the start of the global energy crisis in February, according to the latest stat office data. However, we think that inflation needs to exceed BNM's upper end of its forecast range for 2026 (1.5% to 2.5%) before the central bank starts to consider rate hikes. Overall, the government has been able to stabilize prices so far thanks to fuel subsidies, which at the same time are placing a large burden on fiscal spending as they are estimated to cost around MYR 7bn per month.

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According to recent comments by BNM governor Rasheed Ghaffour, the inflationary pressures have been largely supply-driven so far rather than demand-driven and there are still no signs of broad-based price pressures across the economy. Rasheed Ghaffour also stated that no broad-based measures to deal with Iran War fallout are needed for now. The central bank head also saw no worrying signs in terms of household indebtedness. In our view, his comments indicate that the BNM does not see a need for any drastic policy measures in response to the crisis.

Looking at the recent economic situation, the economy continues to be underpinned by tailwinds coming from the global AI infrastructure spending. Chip exports surged by 46.4% y/y in April, accounting for more than half of total export growth. At the same time, both retail sales growth and industrial production growth remained solid in March at 5.2% y/y and 3.1% y/y, respectively, albeit they eased slightly compared to February. That said, growth is still expected to be affected by the continuing blockade of the Strait of Hormuz as a growing number of manufacturing firms are complaining about raw material shortages, particularly in the petrochemical sector. On the bright side, food price inflation is not expected to accelerate sharply at least until next year given that rising fertilizer prices are yet to impact the food growing cycle.

Overall, we think that it is still too early for the BNM to consider rate hikes despite the slightly worsening inflation outlook. Currently, we think that the BNM is on a trajectory to keep rates unchanged throughout 2026. That said, a potential resurgence of oil prices due to the continuing uncertainty in the Middle East may change this forecast. Especially concerning would be a potential decision by the government to scale back fuel subsidies due to their fiscal cost, which may send inflation sharply higher. However, there are still no indications that the government will significantly curb fuel subsidies and the inflation outlook remains relatively stable for now.

Further Readings

Previous OPR decisions

Quarterly Bulletin Q4 2025

• Next MPC meeting: Jul 8, 2026
• Current policy rate: 6.50%
• EmergingMarketWatch forecast: Hold

Rationale: Romania's central bank is very likely to maintain the key policy rate at 6.50% at the Jul 8 MPC meeting and wait at least until the end of the year before considering a cut, in our view. We base this assumption on persistently high inflation, driven by rising fuel prices following the Iran conflict and a renewed spike in domestic uncertainty after the political crisis. The NBR also revised its end-year inflation forecast to 5.5% from 3.9% in its latest Inflation Report, reflecting a stronger-than-expected impact from fuel prices linked to the Middle East conflict and a more moderate contribution from adjusted CORE2 inflation. As for rate hikes, such moves were previously ruled out by a central bank representative.

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The central bank kept the policy rate unchanged at 6.50% at the May 15 MPC meeting, in line with expectations. The decision reflects a sharp deterioration in the short-term inflation outlook following the escalation of the Middle East conflict and the resulting surge in global energy prices. According to the NBR, the balance of risks has shifted decisively upward, with inflation now expected to rise through June, reaching levels higher than previously anticipated due to fuels and elevated oil and gas prices. Annual inflation is projected to reach around 10.3% in June, driven by both direct energy effects and indirect pressures through higher production costs, especially in food and other energy-intensive goods.

Headline inflation accelerated to 10.71% in April from 9.87% y/y in March, and the central bank expects a temporary re-acceleration until June, driven primarily by imported energy costs. This marks a significant shift from earlier projections, which anticipated a smoother disinflation path supported by base effects and administrative measures.

Governor Mugur Isarescu previously stated that easing was not appropriate in the short term, stressing that the central bank's priority remains inflation control and policy credibility. He warned that a prolonged conflict in the Middle East could have severe consequences for the Romanian economy. Market expectations have shifted accordingly, with some economists seeing no cuts in 2026 and others expecting easing to begin only at the end of the year. Given the new inflation trajectory and the NBR's hawkish tone, we now expect the first rate cut in Q4.

• Сurrent policy rate: 15.0%
• Next monetary policy committee meeting: Apr 24
• Expected decision:50bp cut

Two days ahead of the next board meeting we expect the CBR to cut the policy rate by 50bps again on Friday. This view is in line with the consensus in Russian media, where more than 90% of analysts expect such a move. At the same time, pro-inflationary risks appear to be increasing, so we expect the CBR to send a less dovish signal to the market. In practice, the regulator is likely to reaffirm its commitment to keeping monetary policy tight for longer and to guide expectations toward possible pause in rate cuts later this year. The latest CBR Trend bulletin, published last week, consistently removes arguments that could support a dovish interpretation of current data and adds hawkish ones. These were persistent components above target, inflation expectations are not anchored, and external shocks are pro-inflationary. That said, we believe the Board will still consider three options, including holding the rate or delivering a larger cut of 100bps.

The CBR is also to release an updated medium-term macro forecast. We expect downward revisions to GDP growth, but somewhat higher projections for the average policy rate and credit activity. The key question is whether the inflation forecast will also be revised. SAAR inflation in Q1 is close to the lower bound of the forecast range, while core inflation remains around 4%-5%. At the same time, risks are shifted toward H2/2026 and may be partly contained by a stronger exchange rate. On the other hand, inflation expectations remain elevated. More importantly, fiscal policy and external factors may support demand. Budget spending is running significantly above the planned path, and the situation in the Middle East is pushing oil prices higher, supporting income growth. Any revision would suggest that the CBR views the disinflation trend as expected, which would be inconsistent with its policy approach over the past three years. Therefore, the CBR may choose to keep its CPI inflation forecast unchanged in April.

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The central bank describes the current decline in the contribution of demand to inflation as temporary, drawing parallels to 2018, when the VAT rate was also increased. As a result, SAAR inflation, which rose to 6% in March from 5.8% in February, with Q1 price growth at 8.8% against a 10% forecast, may increase further as the demand component recovers. This recovery may be supported by the previously mentioned factors of the war in Iran and higher budget spending. In our view, inflation expectations are unlikely to have a significant impact on CBR's decision this time, as their relative decline from elevated levels is largely a natural response to lower observed inflation after the peak at the beginning of the year. Although Governor Nabiullina appears to take a balanced view, political factors may exert stronger pressure in this meeting compared to previous ones. President Putin has expressed concerns about insufficient economic growth and may also be dissatisfied with negative public sentiment ahead of the parliamentary elections in September, potentially increasing pressure on the central bank to ease monetary conditions.

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The main argument in favor of softer monetary stance is the cooling of the economy. According to EconMin estimates, monthly GDP growth has remained in the red zone for two months in a row. However, it is debatable whether a lower key rate will help renew economic growth, which is constrained by labour shortages and the crowding out of the non-defense sector. Political pressure, as mentioned, is another factor for a rate cut.

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In its view on the credit segment, the CBR uses slightly more dovish language, but balances it by pointing to faster retail lending and continued fiscal support. Corporate lending growth remained at 12.2% y/y in March, about half of the pace seen in 2024. Household lending picked up slightly in March, but this is driven by fiscal factors such as subsidized mortgages and by regulatory changes, including tighter rules on car imports, rather than by underlying demand dynamics. Overall, the data suggest that the required level of monetary tightness has been reached and the credit channel is no longer exerting strong pro-inflationary effect. But the wording that developments are "within the official forecast range" сan mean that monetary policy is working as planned and does not need big changes.

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Among other factors ahead of the upcoming meeting, risks related to the crisis in the Middle East and the war in Iran cannot be ignored. The current situation supports Russia's export revenues, but at the same time creates risks through cost channels and expectations, which the economic authorities highlight separately. In addition, the duration of the conflict's active phase is still highly uncertain. This uncertainty also makes it difficult to assess the path of fiscal policy. The freeze of FX market operations under the fiscal rule and the still-unresolved plan to revise the cutoff oil price make the outlook for budget spending unclear. In this context, a 50bp rate cut remains the most balanced option, taking into account both the uncertainty and risks on one side and the current trends in the economy and inflation on the other side.

The SARB's MPC is widely expected to increase the main interest rate by 25bps to 7.0% tomorrow, according to both economists' consensus and market pricing. However, the decision is likely to be a difficult one, as the committee will have to balance a clearly deteriorating near-term inflation profile against the still largely supply-driven nature of the shock.

The case for a hike has strengthened after inflation accelerated sharply to 4.0% y/y in April and is now expected, in our view, to peak at around 5.0% y/y by mid-year - considerably above the SARB's 3% inflation target and the 1ppt tolerance band around it. Although the increase has been driven mainly by fuel prices, some MPC members may argue that a pre-emptive move is needed to protect inflation expectations and reinforce the credibility of the 3% target. This credibility argument is the strongest case in favour of a hike, particularly as a 25bps increase is widely expected by economists and largely priced in by markets. Even if the committee is evenly split, Governor Lesetja Kganyago would likely have the decisive role in determining the final outcome. While recent MPC statements have disclosed how many members preferred each policy option, the SARB continues to present the policy rate as a consensus decision, with the Governor holding the prevailing role in the event of a split.

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At the same time, there is a strong economic case for keeping the repo rate unchanged at 6.75% in May. The shock is clearly exogenous, and a rate hike would not directly affect the underlying price level driving the current inflation acceleration. The MPC is also unlikely to have firm evidence of second-round effects at this stage. A hawkish hold would therefore allow the Bank to look through the initial fuel-driven shock and tolerate a temporary move within the tolerance band, especially as inflation is likely to start moderating in the second half of the year. The MPC may also judge that the relative resilience of the rand, persistently strong demand for domestic debt and the still-restrictive policy stance provide enough space to absorb the shock without an immediate policy response. In addition, daily basic fuel price data point to an over-recovery in both petrol and, more substantially, diesel prices for June, suggesting that a fuel price cut is likely, even if partly offset by the phasing out of the fuel tax relief.

However, the case for looking through the shock becomes harder after May. Even if fuel prices begin to moderate in June, headline inflation is still likely to peak in June or July, potentially above 5.0% y/y. If the MPC holds in May, it may find it more difficult to justify another hold in July once the inflation peak has materialised in the data. This means that a May hold would keep the door open to a 25bps hike in July, particularly if core inflation, inflation expectations or rand pass-through show signs of deterioration.

Monetary Policy Committee Statement

Monetary Policy Committee Forecasts and Assumptions

Monetary Policy Review

Next policy meeting: Jul 22

• Key rate: 8.75%
• Previous decision: 100bps rate hike (May 26)
• Our forecast: Hold
• Rationale: Having delivered a decisive 100bps hike, the CBSL is likely to pause at its next MPC meeting on Jul 22, as policymakers assess the pass-through of tighter conditions on inflation and the external sector.

Surprise hike signals decisive shift

The CBSL delivered a larger-than-expected 100bps hike at its May 26 Monetary Policy Board meeting, raising the Overnight Policy Rate to 8.75%. The decision marks a clear pivot toward tighter monetary policy, driven by a convergence of domestic and external pressures, most notably the sustained rise in commodity prices stemming from the ongoing Middle East conflict. The Board identified multiple risks warranting action: an elevated near-term inflation outlook, potential second-round effects from energy price adjustments, credit-fuelled import demand, and the risk of de-anchoring inflation expectations. This was a more forceful response than the wait-and-see stance we had anticipated earlier, reflecting the CBSL's view that the balance of risks has shifted materially to the upside. Having now acted decisively, we expect the CBSL to pause at its next MPC meeting on Jul 22. A 100bps move in a single step is itself a form of front-loading; it buys the CBSL time to evaluate how tighter conditions feed through into inflation dynamics and currency stability before considering any further adjustment.

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Inflation

Inflation has moved sharply higher in recent months, reaching a 26-month high on both major measures. The Colombo CPI rose to 5.4% y/y in April 2026, already at the CBSL's 5% medium-term target. The national CPI (NCPI) similarly accelerated to 4.7% y/y in April from just 2.4% y/y in March. The primary drivers were transport prices, up 14.3% y/y, and housing and utilities, up 7.8% y/y, both reflecting the cumulative impact of fuel price increases since the outbreak of the US-Iran war. Core inflation also jumped sharply to 4.4% y/y from 2.7% y/y in March, a sign that price pressures are broadening beyond the energy shock. Food inflation has so far remained relatively contained at 1.1% y/y in April, though several food-producing sectors have already flagged mild price increases ahead.

The Board acknowledged that headline inflation will likely remain above target in the near term before gradually easing back. Short-term inflation expectations have edged higher, though medium-term expectations are described as well-anchored, a condition the CBSL will closely monitor. Private sector credit continues to expand, feeding into import demand and reinforcing the case for tighter policy, in our view.

External Sector

Sri Lanka's external position has deteriorated from the strength seen at end-2025. The current account recorded only a modest surplus in Q1 2026, weighed down by a wider merchandise trade deficit driven by higher fuel import expenditure and softening tourism receipts. Gross official reserves stood at USD 6.8bn as of end-April 2026, down from a six-year high of USD 7.1bn at end-February, after the CBSL intervened to smooth rupee volatility. The rupee has faced notable depreciation pressure in recent weeks, though the CBSL attributed part of the amplification to speculative activity rather than purely fundamental drivers, and conditions have since eased somewhat.

On the positive side, worker remittances have remained resilient, a key buffer given that the Gulf states 9Kuwait, the UAE, Saudi Arabia and Qatar) are Sri Lanka's top four sources of remittance inflows. Looking ahead, the CBSL expects approximately USD 1bn in multilateral inflows in early June, comprising a USD 700mn IMF tranche and roughly USD 250mn from the ADB and World Bank, which should provide meaningful relief to the reserve position. The IMF's board was scheduled to consider the fifth and sixth reviews of Sri Lanka's Extended Fund Facility on May 27, with the deputy finance minister expressing confidence in approval. The government has also flagged expected disbursements of USD 480mn from the ADB, USD 150mn from the World Bank, and USD 50mn from an affiliated institution during the year.

GDP Growth

Growth dynamics remain broadly resilient relative to inflation and external pressures. GDP expanded at 5.0% in 2025, a modest easing from 5.3% in 2024, and leading indicators had pointed to a firm start to 2026 prior to the war's escalation. The 100bps rate hike will weigh on credit and domestic demand in the quarters ahead, though the magnitude of the drag will depend on how quickly financial conditions tighten through the economy.

Conclusion

The CBSL's decision to hike by 100bps reflects a central bank that has moved from a watching brief to active defence of its inflation target and currency stability, in line with most central banks globally turning hawkish. With this front-loaded adjustment now in place, we expect the Board to hold rates steady at the next MPC review on Jul 22, using the intervening period to assess inflation pass-through, the impact of expected multilateral inflows, and any evolution in the geopolitical situation. A further hike later in H2 cannot be ruled out if external pressures re-intensify or if medium-term inflation expectations show signs of drifting higher, but for now, the CBSL has bought itself room to wait.

Further reading

Latest MPC decision

Calendar of MPC meetings

• Next MPC meeting: Jun 24
• Current policy rate: 1.00%
• EmergingMarketWatch forecast: Hold
• Rationale: GDP for Q1; CPI and PPI for April; lending growth in Q1; stable baht

We think that BOT's Monetary Policy Committee (MPC) will keep the policy interest rate unchanged at 1.00% in its meeting on Jun 24, the third one for 2026. In April, the MPC voted unanimously (6-0) to maintain the key rate at 1.00%. The decision was in line with expectations.

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There have been a number of new data releases since the previous Central Bank Watch. They included GDP data for Q1, inflation for April and indicators of the banking system for Q1. The GDP growth was better than consensus forecasts and loan growth turned positive. On the other hand, the office of the national economic and social development council (NESDC) maintained its forecast of this year's GDP growth in the range 1.5-2.5%.

At the same time, the CPI inflation for April was higher than consensus forecasts. It was within the 1-3% target range for the first time since Feb 2025. The exchange rate of the baht against the US dollar has changed only slightly since Apr 29.

All in all, the higher-than-expected inflation and GDP growth seem to support the case for a policy rate hike. However, at its latest meeting in April, the MPC had already projected CPI inflation above the target range for some time, driven by global energy prices and cost pass-through.

Economic growth

The GDP increased by 2.8% y/y in Q1, speeding up from 2.5% y/y growth in Q4 2025, the NESDC said earlier in May. The latest result was above the 2.4% estimate in a Bloomberg poll of 17 economists, as well as the 2.2% median forecast in a Reuters poll. In seasonally adjusted terms, GDP rose by 0.7% q/q in Q1, after increasing by 1.9% q/q in Q4.

The NESDC also announced its new economic projection for 2026. The agency maintained its forecast of GDP growth in the range 1.5-2.5%. Investment is predicted to rise by 3.5% this year, an upward revision from 1.8% projected in February. The expected growth rates of private and public investment have been revised up to 3.7% (from 1.9%) and 3.1% (from 1.7%) respectively. The NESDC raised its forecast of 2026 private consumption growth to 2.4% from 2.1% but maintained its prediction of government consumption growth of 1.2%.

The agency raised its projection of export growth to 6.2% from 2.1% predicted in February. The forecast of import growth was increased to 7.7% from 2.5%.

Inflation

The headline CPI increased by 2.89% y/y in April, after dropping by 0.08% y/y in March. The latest reading compared with an estimate of a 2.20% rise in a Bloomberg poll of 19 economists and a 1.81% increase forecast in a Reuters poll. Domestic fuel prices rose significantly due to the Middle East conflict, the commerce ministry said. Public transport fares increased subsequently. The prices of prepared food and fresh vegetables also rose. The CPI increased by 0.32% y/y in Jan-Apr.

As of May, the NESDC forecast this year's CPI inflation in the range from 2.0% to 3.0%. In February, inflation was seen in the range from -0.3% to 0.7%.

The PPI increased by 9.1% y/y in April, speeding up from 6.0% y/y growth in March. The index rose by 2.6% m/m in April, after climbing 5.7% m/m in March. The PPI increased by 3.2% y/y in Jan-Apr. The acceleration of annual PPI inflation in April was supported by all main sectors.

Lending

The banking system's loans edged up 0.2% y/y in Q1, after dropping by 1.1% y/y in Q4. Business loans rose by 1.0% y/y, after declining by 1.0% y/y. Large corporate loans increased by 2.7% y/y in Q1, whereas loans to SMEs fell by 4.0% y/y. The positive growth of the former was partly due to higher working capital demand reflecting higher energy and raw material costs among companies directly affected by the Middle East conflict. The negative growth of loans to SMEs was in line with heightened credit risks, which were also the reason for a 0.7% y/y decline in consumer loans in Q1. Consumer loans dropped by 1.1% y/y in Q4.

The NPLs amounted to THB 535.8bn in Q1, almost unchanged from previously reported THB 536.0bn in Q4. There was a moderation in the formation of new NPLs across all loan portfolios. The NPL ratio was 2.85% in Q1, up from 2.84% in Q4. The NPL ratio for business loans was flat at 2.68%. The NPL ratio for consumer loans edged up to 3.19% from 3.17%.

Meanwhile, the ratio of stage 2 loans to total loans dropped to 7.00% in Q1 from 7.07% in Q4.

Exchange rate

The exchange rate of the Thai baht is USD/THB 32.613 at the time of writing, which compares with USD/THB 32.745 on Apr 29, the date of the latest MPC meeting.

We do not expect the exchange rate of the baht to be a factor of decisive importance during the MPC meeting in June.

Further reading

MPC decision of Apr 29

Schedule of MPC meetings

Edited minutes of MPC meetings

Monetary policy report

• Current rate: 15.0%
• Next rate decision: Apr 30
• Our forecast: on hold

The central bank (NBU) is likely to leave the key policy rate (discount rate) unchanged at 15.0% tomorrow again. It did so on Mar 19, after cutting the rate by 50bps on Jan 29. At the same time, the NBU has made it clear that a new easing cycle is unlikely to be resumed any time soon, as disinflation stopped, and the geopolitical situation has been more complicated than early this year.

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The headline CPI inflation picked up to 7.9% y/y in March from 7.6% in February, which was somewhat higher than projected by the NBU in January. The higher inflation was mainly due to the Iran war, as fuel price inflation accelerated to 23.4% y/y in March. Core inflation, which inched up to 7.1% y/y in March, also exceeded the NBU's expectations. On the upside, Ukraine has finally secured a new EUR 90bn loan from the EU for 2026-2027, so there is now more certainty about foreign assistance and, consequently, about defence funding.

All 11 MPC members were in favour of another on-hold decision at the Mar 18 rate discussion, which decision the NBU announced the following day. A summary of the meeting was published by the NBU on Mar 30. At the same time, most of the MPC members were in favour of a more cautious approach to policy, compared to the NBU's January forecast. Seven of them spoke in favour of keeping discount rate at 15.0% till the end of 2026, and one even expected a rate hike. Only three MPC members expected more easing later this year.