• 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: Mar 19, 2025
• Current policy rate: 13.25%
• EmergingMarketWatch forecast: 100-bp hike (to 14.25%)

IPCA-15 inflation rose to 4.96% y/y 12-month terms to mid-February, pushing further above the 4.50% upper limit of the +/- 1.50 percentage point fluctuation band around the BCB's 3.00% inflation target. Housing prices drove the increase after two consecutive declines that had been tied to reduced electricity prices. The February rise thus confirms that the January inflation slowdown was temporary. With the IPCA-15 print signaling that official inflation for February (IPCA) will likely reach around 5.00%, the Copom is expected to follow its guidance and hike the Selic rate by 100bps to 14.25% at its next policy sitting on Mar 19. While the committee will leave its options open, this does not mean the tightening cycle will be paused, in our view.

Economic activity is expected to slow in 2025, though the extent of this remains uncertain. At the same time, President Lula da Silva's approval rating is falling, and fiscal concerns are resurfacing after a period of relative stability. Inflation remains a top concern for the public, according to recent polls, with a significant portion blaming Lula for rising food prices.

In an effort to ease food inflation, Lula has been seeking relief measures, but their immediate effectiveness remains doubtful. It looks like his administration has turned to credit-boosting initiatives, such as allowing an additional FGTS withdrawal and introducing a new payroll credit line, to inject liquidity into the economy without worsening the primary fiscal balance. However, these measures send mixed signals about the government's fiscal responsibility and commitment to inflation control, which could force an even stronger reaction from the BCB.

Overall, we expect the Copom to raise the Selic rate by 100bps to 14.25% at its March meeting, taking it to its highest level since 2016. Looking beyond March, the committee will likely maintain a data-dependent stance. Inflation is expected to remain above the 4.50% upper limit through Q3 2025, with the BCB forecasting a return to 4.00% only by Q3 2026 (the relevant policy horizon). However, inflation expectations remain de-anchored, and core inflation remains above the 3.00% target, suggesting that Copom will continue hiking beyond March, albeit at a slower pace than the 100bps seen in recent months. We expect the Selic rate to reach around 15.00% by mid-2025, with economic activity trends and fiscal policy decisions serving as key determinants of the magnitude and duration of rate hikes.

• Next MPC meeting: Mar 26, 2025
• Current policy rate: 3.75%
• EmergingMarketWatch forecast: Hold

Rationale: While the tone of the post-meeting statement from February was less hawkish than before, we expect that mounting upside risks will make the CNB board more cautious. The unanimous decision in favour of a 25bp cut will not matter much, either, as we expect that circumstances will be different, come the next MPC meeting in March. The minutes of that board meeting support our expectations, as the tone was more hawkish than implied in the post-meeting statement. The main reasoning behind the cut was that the CNB board would like to be in a more comfortable position to respond to external shock, which could include either more easing or more tightening. The latter has been brought up in recent remarks by board members, which shows clearly that the board is taking risks to the inflation outlook seriously.

Karina Kubelkova confirmed that while more adverse scenarios were discussed, the general assumption was that the board would rather not act on potential risks, but based on actual developments. Yet, we know for a fact that there is a much more negative scenario prepared by CNB staff, which has not been made public yet. To give you a general idea, the finance ministry already expects that US trade tariffs on EU exports will have a downward impact on GDP growth of about 0.4pps in 2025, so we imagine the CNB's scenario is along similar lines. Jan Prochazka said that the CNB should brace for higher uncertainty, but this would mean the policy rate needs to be lower than either 4% or 3.75%.

Thus, it appears that the outcome of the next MPC meeting will be decided by external developments. We have renewed tariffs on aluminium and steel imports already, and the White House is now considering European VAT as a non-tariff barrier, which means reciprocal tariffs could be at least 25%. Furthermore, there is now talk of a 10% tariff on EU car exports on top of what has been already announced, which will hit particularly Germany. Given the large exposure of Czech manufacturers to Germany, particularly the automotive sector, we expect this will have a negative impact. The other major risk is energy prices, as natural gas prices have kept rising at a very solid pace. While the Czech energy retail market relies heavily on long-term delivery agreements, higher gas prices will inevitably creep in. We also have food prices rising much faster than anticipated, judging from the January CPI print, and we expect similar developments in February. It means headline inflation will be visibly above the CNB's projections, which put it at 2.6% y/y in February and March. Core inflation has also picked up, through imputed rentals, which remains an upside risk.

We do not rule out the scenario where nothing much happens, which should allow the CNB to ease monetary policy a bit more. However, we are on the bearish side regarding external developments, which is why we don't believe the CNB will have that luxury. We see another 25bp cut in May as the more likely outcome, as it allows the CNB to prepare for a scenario with lower growth than previously anticipated. Nevertheless, the outlook remains highly uncertain, and we reserve our right to revise our prediction, as neither outcome is set in stone at this point.

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Further Reading:

CNB board statement from latest MPC meeting, Feb 6, 2025

Post-meeting press conference, Feb 6, 2025 (in Czech)

Q&A after the latest MPC meeting, Feb 6, 2025

Minutes from the latest MPC meeting, Feb 6, 2025

Monetary Policy Report, February 2025

Macroeconomic forecast, February 2025

Meeting with analysts, Feb 7, 2025

CNB board profile

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

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

• Next MPC meeting: Feb 20, 2025
• Current policy rate: 27.75%
• EmergingMarketWatch forecast: 26.75-27.75%

The MPC will hold a regular rate-setting meeting on Feb 20 and although we suggested two weeks ago that the committee might launch the monetary easing cycle with a 100-150bps rate cut, we now think the MPC may delay the long-awaited cut. The reason for this change is the disappointing January CPI inflation, which came in at 23.9% y/y compared to market expectations for a 23.0% y/y print. Core inflation eased only slightly to 22.6% y/y from 23.2% y/y in December, pointing towards strong underlining inflationary pressures. There are other risks as well. The Gaza ceasefire appears increasingly fragile now, which could reignite regional tensions and supply-line disruptions; and FED is likely to hold interest rates considering the uncertainty around Trump's trade tariffs, which will drag on investor sentiments towards riskier emerging markets. While energy commodity prices have largely moderated, they continue to be susceptible to supply shocks such as global trade disruptions and adverse weather conditions. Further, education costs are expected to be raised in February, as Egypt had postponed the adjustment that was due in October, which may add a full percentage point to the headline inflation rate. We believe the MPC will take these risks into account and will hold the rates or implement a cautious 50-100bps rate cut later this month.

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Consumer inflation has been on a downward trend since it peaked at 37.9% y/y in September 2024, interrupted by fuel and electricity price hikes during 2024. The slowdown is expected to continue throughout 2025, supported by favourable base effects, tight policy stance, steady disinflation in the heavy-weight food category, and improvement in inflation expectations since the currency reform from March 2024. Further, market reports suggest foreign portfolio investors have returned to the debt market since the start of 2025. Should the ceasefire agreement hold and the hostilities in the Red Sea subside, the traffic through the Suez Canal - a key FX earner for Egypt - is expected to gradually recover. Taking all these into account, analysts are unanimous the MPC will start cutting rates during H1 2025, but we are not sure if the first rate cut will be implemented this month or pushed back to April.

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The MPC has delivered a massive 19pps interest rate increase and 400bps increase in the required reserve ratio since March 2022, but consumer inflation remains broad-based, reflecting FX pass-through, surging food prices, supply line disruptions, and robust monetary expansion. In the last meeting for 2024, the MPC also decided to extend the inflation target horizons to Q4 2026 and Q4 2028 at 7% (+/- 2.0pps) and 5% (+/- 2.0pps) on average, respectively, in line with CBE's gradual advance towards implementing a fully-fledged inflation targeting regime.

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Monetary Policy Committee Statement

Monetary Policy Review

Monetary Policy Committee Meeting Schedule

• Next MPC meeting: Mar 25, 2025
• Current policy rate: 6.50%
• EmergingMarketWatch forecast: Hold
• Rationale: Policy rate to be kept unchanged for prolonged period of time, MPC signals

The MPC is likely to keep the policy rate on hold for a prolonged period of time, as the outlook on monetary policy shifted with its rate-setting meeting in January. The MPC kept the policy rate and the overnight interest rate corridor unchanged on the meeting, but signalled deteriorating inflation outlook. it introduced a small, but visible change in the wording of its policy guidance, omitting the earlier description of the monetary policy stance as a pause in the rate-cut cycle. Instead, the MPC said that it will keep monetary conditions tight. The stance was re-confirmed in February and the MPC introduced global trade policies as another pro-inflationary risk as a factor behind its hold decision. NBH deputy governor Barnabas Virag reiterated at the usual background discussion after the February meeting that no change of the policy rate was foreseen in the short term.

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The February hold decision was taken in the context of higher-than-expected inflation in January. The inflation developments meant that the NBH will revise its inflation projections up with its next Inflation Report in March, Virag pointed out. The February MPC meeting will be the last with the current composition of the council since two new members will come for the next meeting - new NBH governor Mihaly Varga will replace outgoing governor Gyorgy Matolcsy and Andrea Mager will replace external member Gyula Pleschinger. Pleschinger had commented prior to the February MPC meeting that a rate hike was unthinkable for 2025, while also saying there was no room for rate cuts till the end of this year. Virag did not comment on the rate cut part of Pleschinger's statement, while he disagreed with the zero chances for rate hikes, rather saying that nothing should be ruled out in the current volatile global environment. The tone of the monetary policy guidance in February, however, did not suggest a more hawkish stance than in January, in our view.

The deterioration of the inflation outlook required the change in the monetary policy stance by ruling out possible rate cuts in the short term, the MPC and Virag have explained. The MPC reiterated concerns with the recent upward trend of inflation expectations, excise tax hikes and the depreciation of the forint as the factors behind the deterioration of the inflation outlook, in addition to uncertainty regarding the monetary policies by leading global central banks. The divergence between the monetary policies of the ECB and the Federal Reserve was also a factor against monetary loosening, since it increased investor risk aversion towards emerging markets, Virag explained.

Monetary policy decisions going forward will be based on the evaluation of three set of factors. The first set included inflation expectations, forint exchange pass-through and global commodity prices. The second set included developments of the external and fiscal balances, followed by country-specific risks and changes in foreign investor sentiment, Virag explained.

Post-meeting MPC statement from January rate-setting meeting

Background presentation of NBH deputy governor Virag after January rate-setting meeting

Minutes from January MPC rate meeting

Inflation Report - Q4/2024

MPC meeting calendar 2025

• Next Policy Meeting: April 7-9
• Current Policy Rate: 6.25%
• Last Decision: 25bps cut (Feb 7, 2024)
• Our Forecast: Hold

• Rationale: The RBI will wait to see the effect of the recent rate cut and therefore hold the rate in April. Easing inflation will provide sufficient room to keep the policy rate steady

In its last meeting on February 8, the Reserve Bank of India's Monetary Policy Committee (MPC) cut the repo rate by 25bps to 6.25%, bringing the standing deposit facility (SDF) to 6% and the marginal standing facility (MSF) to 6.5%. The MPC voted unanimously to cut the rate underscoring the shift in priority towards economic growth. The rate cut comes despite the depreciation of the INR in recent weeks.

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Inflation Dynamics

Given the easing of inflation to a five-month low in January 2025, the concern around prices will ease. The RBI believes that the arrival of the rabi harvest and easing supply chain issues will see inflation decline over Q1 2024. CPI eased to 4.3% y/y in January 2025, driven by easing food prices. The headline inflation rate remained over 5% for most of 2024 and risks still remain tilted to the upside. A concern now is imported inflation, especially given the recent depreciation of the INR. Government interventions, such as releasing food reserves and imposing export restrictions, have helped contain short-term price spikes. However, global uncertainties-particularly volatile crude oil prices and geopolitical tensions-pose lingering risks. The RBI's inflation projection for FY26 is 4.2% y/y, still over the 4% medium term target.

Economic Growth

Economic activity showed signs of slowing in Q2 FY25, with private consumption weakening and government expenditure rising at a modest pace. Manufacturing GVA growth slipped to 2.2% y/y from 7% in Q1, reflecting sluggish industrial output. Agriculture, however, remained resilient, expanding by 3.5% y/y compared to 1.7% a year ago. In response to the slowdown, the RBI revised its GDP growth forecast for FY25 downward to 6.6% y/y from 7.2%. Inflation-driven erosion of household purchasing power has dampened demand, while sluggish credit growth in key sectors has weighed on overall momentum.

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Recent PMI data points to continued softness in Q3 FY25, though a recovery is anticipated in H2 FY25 as public expenditure picks up and consumer demand strengthens. The January PMI too showed a slight easing. With growth losing steam and not a major push from the government in its FY26 budget, the responsibility for driving growth is now the RBI's. As a consequence, the RBI was seen reducing the rate in February. Given the latest rate cut, the RBI will wait to see the policy cut transmission before trimming rates further in Q2.

Financial Sector

Despite macroeconomic challenges, India's banking sector remains stable. Credit growth averaged 16% y/y in 2024, fuelled by strong demand in retail lending, services, and infrastructure financing. Foreign exchange reserves stood at USD 640.3bn at the end of 2024, providing a cushion against external shocks.

However, the depreciating rupee remains a key concern. The INR has weakened to a record low of 87.6 per USD, pressured by a strong dollar amid resilient US economic performance. With currency stability in focus, the RBI may opt for a measured approach to rate cuts, ensuring that monetary easing does not exacerbate external vulnerabilities.

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Budget Implications

The recently announced Union Budget for FY26 has taken a fiscally cautious approach, avoiding any substantial increase in capital expenditure. With limited fiscal space to drive growth, the RBI will be expected to play a larger role in supporting economic momentum. A February rate cut could help lower borrowing costs and stimulate investment, providing a much-needed boost in the second half of the fiscal year.

Conclusion

Following a 25bps rate cut in February - marking the RBI's first step toward policy easing in 2025 - the central bank will hold rates in April, in our view. With the rupee under pressure and global uncertainties persisting, the central bank is expected to pause in April, allowing time to assess the impact of its policy shift. While inflation expected to moderate further and economic growth remains a concern, the RBI will likely proceed with another rate cut subsequently in Q3.

Further Readings

Monetary Policy Meeting Statement, Feb 2025

Reserve Bank of India Consumer Confidence Survey, Feb 2025

Reserve Bank of India Household Expectations Survey, Feb 2025

• Next policy meeting: Mar 18-19
• Current policy rate: 5.75%
• Our forecast: Hold
• Last decision: Hold (Feb 18-19)
• Rationale: Rupiah's stability is key concern, but BI turns its eye to economic growth too as inflation remains within the target band

We expect Bank Indonesia to keep the key rate on hold in March, mirroring the decision from February. After the surprising 25bp rate cut in January, the central bank will likely wait to evaluate its options, with another rate cut possibly coming in April or May. We remind that the central bank has now turned its attention to economic growth as well, apart from the rupiah's stability, while inflation has not been a concern for the past year.

The rupiah's stability used to be the main factor behind MPC decisions in 2024, but the last rate cut came on the back of ongoing depreciation against the USD. This possibly suggests that the exchange rate has now taken a backseat and the BI's is more concerned with lowering the key rate while inflation is close to the bottom end of its 2.5+/-1% target band in a bid not to suppress economic activity.

Moreover, the Fed's monetary easing plans have been delayed in 2025, after the three successive rate cuts in H2 2024. With expectations for a more gradual policy easing by the Fed, this should provide some breathing space to Bank Indonesia and ease the pressure on the local currency.

Moreover, concerns over global economic growth have increased, particularly after US President Donald Trump started imposing tariffs on trading partners. As a result, central banks have cut rates across the globe on lower GDP growth projections.

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GDP growth

GDP growth accelerated to 5.02% y/y in Q4 from 4.94% y/y in Q3, gaining a slight pace after slowing in the previous two quarters. Still, the annual growth came at 5.03% in 2024, below the government's 5.1% projection. Notably, BI cut slightly its GDP growth forecast in January to 4.7-5.5% in 2025, as it cut the key rate, and then maintained it at the February MPC meeting. This fuelled speculations that the central bank is concerned with economic growth slowing in the tight monetary policy environment.

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

Exchange rate stability

The rupiah lost 6.3% against the USD in 2024, with the downward trend continuing in early 2025 as well. There was some recovery in Q3 2024, but it was short-lived as growing tension in the Middle East coupled with Trump's win at the US presidential elections boosted the USD against all EM currencies.

The rupiah's stability had been the main factor behind recent key rate decisions, with its depreciation leading to rate hikes earlier in 2024, while the gains in Q3 led to a rate cut perhaps sooner than expected. However, the BI abandoned this trend in January, cutting the key rate despite the ongoing depreciation.

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

Inflation environment

CPI inflation slowed to 0.76% y/y in January from 1.57% y/y in December, but this was due mainly to a one-off factor, that is the temporary reduction of electricity tariffs for households in Jan-Feb. This is aimed mainly at mitigating the impact of the 1pp VAT rate hike as of Jan 1 on households.

As a result, CPI inflation is below the central bank's target range of 2.5+/-1%. Still, it should rebound in March as the government has not extended the electricity tariff cut beyond February.

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

Conclusion

Looking forward, we expect BI to remain vigilant regarding further rate cuts, due to the renewed pressure on the rupiah. As a result, the next rate cut could take place in April or May, in our view, provided that the rupiah stabilises around the current level.

On the other hand, should the BI redirect its attention to economic growth, we may see another surprising rate cut, perhaps sooner than expected. The pace of the Fed's monetary easing will also play a key role, as further delays on the Fed's side might lead to the BI remaining on hold for longer, in our view.

Further reading

Last MPC press release

Calendar of MPC meetings

• Next MPC meeting: March 27
• Current policy rate: 9.50%
• EmergingMarketWatch forecast: 50bps cut

The consensus within the Monetary Policy Council (MPC) to cut its policy rate by 50bps in the March 27 sitting is robust and we now believe it will do so even if volatility in the financial system increases as a result of an eventual protectionist policy imposed by the Donald Trump administration.

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The latest sitting minute shows four of five board members favor fast monetary easing ahead. Indeed, we won't be surprised if the next decision statement says one more 50bps cut is still to be considered in the May 15 sitting. This, considering the CB is sure to cut its policy rate again in June 26, even if by 25bps, suggests the policy rate will be closing the semester at 8.25 or 8.50%, pressuring year-end expectations down.

Comments made by the MPC while presenting the CB's quarterly report show the MPC is unworried about the path taken by the Federal Reserve. The board noted that conditions with the US diverge at this moment, with Deputy Governor José Gabriel Cuadra saying the US economy remains resilient while Mexico's is slowing, and considering that the US Monetary Policy Rate (MPR) is far closer to its position of neutrality than Mexico's.

The board continues to say its easing will not bring the policy rate to expansive territory, recognizing the inflationary risks remain tilted upwards. However, some board members say the inflationary outlook has improved, particularly as the growth projection weakens. However, we note core CPI inflation has found some resistance to slow below 3.60%, remaining well above the CB's general inflation punctual target, and we insist mid-term expectations remain above the latest read of general inflation, with analysts expecting inflation to close 2026 and 2027 at 3.60%.

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The more dovish board members, including Governor Victoria Rodríguez and Deputy Governor Omar Mejía, have said in the past that a weakening mid-term growth outlook increases the need for fast monetary easing. This may gain relevance as the economy slowed more than expected to close 2024 and as 2025 GDP growth expectations fall further. On this, Deputy Governor Jonathan Heath explained that the CB is not deciding whether to fight inflation or to favor economic growth, rather claiming weaker growth expectations allow for further monetary easing.

The minute and the quarterly report presentation gave a glimpse of the reasoning of recently appointed Deputy Governor Cuadra. We were surprised to see him assume such a dovish tone, echoing comments made by the dovish board, including Governor Victoria Rodríguez. He made a more technical defense of the dovish stance than Governor Rodríguez or Deputy Governor Omar Mejía ever did. Indeed, we expect Cuadra to become one of the most respected voices within the MPC, with a more solid monetary policy background that any of his peers.

Overall, we are confident the CB will cut its policy rate by 50bps in March. We won't be surprised if it anticipates another 50bps cut in May. However, we expect this fast pace to be relatively short-lived, moving back to 25bps cuts in June. We expect the CB will be cutting its policy rate constantly during most of the year. Indeed, there is much uncertainty about the MPR's 2025-end position, given risks of regional protectionism and lingering inflationary pressures; still, we now anticipate the policy rate will close the year below 8.00%, barring a trade war in the region.

• Next MPC meeting: 19 - 20 February 2025
• Current policy rate: 27.5%
• EmergingMarketWatch forecast: 27.5%

The CBN has scheduled the first 2025 meeting of the MPC for Feb 19 and 20, initially meant to be held on Feb 17 and 18. This comes as the statistics office is expected to release rebased CPI figures around the 15th of this month. Rebasing the CPI is expected to result in a lower reported inflation rate, which may reduce the urgency for the CBN to maintain a tight monetary policy. However, the underlying economic pressures of high food and energy costs persist. Inflation hit an almost 29-year high of 34.8% in Dec. In the breakdown, food inflation rose marginally slower at 39.8% y/y, from 39.9% y/y in Nov. Imported food inflation moderated to 41.3% y/y compared to 42.3% y/y in Nov. Analysts expect inflation to have peaked in Dec due to festive buying. A disinflationary trend is expected in the long term, supported by FX stability, economic policy and base effects. Still, analysts have very mixed expectations for the next MPC meeting. Some anticipate that the CBN may opt to maintain the current rate of 27.5%, considering the significant policy tightening already implemented in 2024. Others anticipate a small hike. Several MPC members at the Nov meeting, including Bandele Amoo and Lamido Abubakar Yuguda, expressed caution and said that while inflation is moderating, it may still be premature to end the tightening cycle. CBN governor Yemi Cardoso has also consistently reiterated the bank's commitment to addressing inflation and achieving price stability. However, in Nov he hinted that the MPC intends to evaluate the impact of prior policy measures. It will depend on the MPC's reaction to the rebased CPI (if it is released on time), but we believe that the MPC will hold the policy rate at the Feb meeting. Should food and energy inflationary pressures begin to subside, we think the CBN is likely to begin its monetary easing cycle at the second or third MPC meeting of 2025.

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The naira is expected to stabilize in 2025, building on reforms and economic adjustments initiated in 2024. Key drivers of this expected stabilization include cooling inflation, with government targeting a decline to 15% by the end of 2025. Additionally the recapitalization of Nigerian banks is expected to strengthen the financial sector. Progress in exchange rate unification through the CBN Electronic Foreign Exchange Matching System (EFEMS) has improved transparency and reduced reliance on parallel markets. Additionally, through the Dangote Refinery and revitalized state refineries, increased oil production is expected to increase foreign exchange earnings. Diversification efforts, such as boosting non-oil exports and a bilateral minerals agreement with France, should further support the naira's recovery. However, risks remain including volatile global oil markets, inflationary pressures, rising debt servicing costs and potential speculative activities. The naira's stability depends on the effective implementation of economic reforms and the management of external challenges.

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Several experts and organizations have recently weighed in on whether the CBN should continue or halt its rate hikes. Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting, suggests that the extent of the policy tightening and its emerging results may indicate a preference for holding the rate steady. Fitch Solutions expects the CBN to cut the MPR by 450bps to 23.00% over the course of 2025. According to Fitch, the expected monetary easing will begin at the second MPC meeting of 2025 as inflationary pressures moderate, driven by increased FX market stability and the near-completion of fuel subsidy removal, which should reduce the need for significant price hikes in the year ahead.

Monetary Policy Committee Statement

Monetary Policy Committee Meeting Schedule

• Next policy meeting: March 10, 2025
• Current policy rate: 12.0%
• Last decision: Cut by 100bps (January 27, 2025)
• Our forecast: Cut by 50-100bps
• Rationale: Benign inflation outlook and external sector stability to prompt another, but likely smaller, rate cut

The State Bank of Pakistan (SBP) on Jan 27 cut the policy rate by 100bps to 12.0%, the lowest since March 2022. It was the sixth straight cut in the key rate, bringing total reduction to 1,000bps since June 2024 when the policy rate was at an all-time high of 22.0%. The decision, which was in line with market expectations, was underpinned by easing price pressure and the country's comfortable external position. Despite a sharp moderation in inflation, the rate cut of 100bps was smaller than seen in the previous three rounds. The central bank justified the "cautious monetary policy stance", noting that it is crucial to ensure price stability.

In a bid to achieve the inflation target of 5%-7% on a durable basis, the SBP stressed on keeping the real interest rate "adequately positive" on a forward-looking basis. This has been recommended by the IMF as well. Thus, we believe that the current easing cycle has almost come to an end, given that the global lender projects inflation at 7.8% in FY26. Having said that, there might be some room to cut the policy rate by another 50-100bps, which is likely to be delivered in the March meeting.

Inflation environment

CPI rose 4.1% y/y in December, the lowest since April 2018. The SBP attributed the downtrend to weak domestic demand conditions and supportive supply-side dynamics as well as favourable base effects. Inflation is expected to moderate further in January before inching up in subsequent months, especially from May onwards when the impact of the favourable base effect will phase out. The central bank, however, pointed out that underlying price pressure remains elevated, with core CPI (in rural areas) rising 10.7% y/y in December, although gradually easing from a record 27.3% y/y in Sep. 2023.

In light of recent readings, the SBP sharply revised down its average inflation forecast to 5.5%-7.5% in FY25, from 11.5%-13.5% predicted in July 2024. The forecast is upbeat compared to that of the IMF, which in October projected inflation at 9.5% in the ongoing fiscal year. During Jul-Dec FY25, inflation averaged 7.2% y/y compared with 28.8% y/y in the same period last year.

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External sector

The SBP's optimism regarding the near-term outlook for Pakistan's external sector strengthened further as it said the current account (CA) may post a slight surplus in FY25. Supported by strong workers' remittances and export earnings, the CA has been in surplus since August, clocking in at USD 582mn in December after reaching a nearly decade-high of USD 684mn in November. As a result, the central bank upgraded its projection for CA, which is now expected to remain between a surplus and a deficit of 0.5% of GDP in FY25, revising it from the 0-1% deficit estimated earlier.

The SBP expressed confidence that its foreign exchange reserves are likely to exceed USD 13bn by June, in large part driven by an improvement in net financial inflows. The reserves have seen a decline in recent weeks on the back of external debt repayments. As of Jan. 17, they stood at USD 11.45bn, the lowest in nearly two months. The central bank said that a sizable part of debt repayments (USD 6.4bn out of USD 10bn, according to the SBP governor) has already been made.

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GDP growth

The SBP said that economic activity continues to show gradual improvement, as evidenced by an increase in sales of cars, fuel and fertilizer as well as a pick up in import volume and credit disbursement to the private sector. With regard to a continued contraction in industrial output, the central bank said that the downtrend is led by a few low-weight items, such as furniture. In contrast, key industrial sectors - such as textile, food and beverages, and automobiles - have shown noticeable improvement. Nevertheless, it appeared a tad downbeat regarding GDP growth in the ongoing fiscal year following Q1 data, which showed 0.9% y/y growth, the lowest in five quarters. The central bank projected the economy to expand between 2.5-3.5% in FY25. Earlier, it expected growth to be in the upper half of the projected range.

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Conclusion

The sharp deceleration in inflation has prompted an aggressive reduction in the policy rate. In just a matter of over seven months, the SBP slashed the benchmark interest rates by 1,000bps. The current monetary policy easing is now nearing its end. We expect the central bank to cut the key rate by 50-100bps in March before calling it a day, given that it is determined to keep the real interest rate on a forward-looking basis adequately positive. In an interview with Bloomberg following the latest policy meeting, SBP governor Jameel Ahmed said that easing prices and lack of pressure on the external account give the central bank confidence to "revise (the policy rate) slightly down".

Useful Links

Previous policy rate decisions

Latest IMF report on Pakistan

• Next monetary policy meeting: Apr 3
• Current policy rate: 5.75%
• EmergingMarketWatch forecast: Hold or 25bp cut
• Rationale: Monetary Board statement of Feb 13; Comments by Governor Remolona

We think that a hold decision and a 25bp reduction of the policy interest rate are both possible at the next meeting of BSP's Monetary Board (MB) on Apr 3, the second one for 2025. Last week, the MB decided to maintain the central bank's Target Reverse Repurchase Rate at 5.75%. The decision was a surprise, as the consensus forecasts had indicated a 25bp cut. The interest rates on the overnight deposit and lending facilities hence continued to be 5.25% and 6.25%, respectively.

All in all, keeping monetary policy settings steady is warranted by uncertainty about the outlook for inflation and growth. According to the MB, it is prudent to await further assessments of the effects of global policy uncertainty and the potential impact of the actual policies before deciding on the timing and magnitude of further key rate cuts.

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Going forward, the central bank expects to continue its measured shift to less restrictive monetary policy settings. Remaining data-dependent, the central bank will ensure price stability consistent with sustainable economic growth and employment. We remind that the BSP has made three consecutive 25bp policy rate cuts at the last three MB meetings for 2024.

Through the hold decision, the BSP wants to avoid a situation where it will have to reverse itself, BSP Governor Eli Remolona told CNBC on Friday. He said that they want to remain on an easing trajectory. According to him, a cut of banks' reserve requirement ratio is possible to take place before the MB meeting on Apr 3, Bloomberg reported.

Inflation

CPI inflation was 2.9% y/y in January, unchanged from December. The inflation target range is 2.0-4.0%.

On Thursday, the BSP said that its new inflation forecasts are not significantly different from the previous forecasts made in December. For this year, the risk-adjusted inflation forecast rose to 3.5% from 3.4%. The risk-adjusted forecast for 2026 continues to be 3.7%. Inflation expectations stayed within the target band.

The risks to the inflation outlook have become broadly balanced for this year and next year. The utilities sector is seen as the source of upside pressures. The effects of lower import tariffs on rice are still the main downside risk to inflation.

Economic growth

Domestic growth prospects remain firm, the MB noted on Thursday. Nonetheless, uncertainty over global economic policies and their effects on the Philippine economy has risen significantly.

We remind that the GDP increased by 5.2% y/y in Q4, maintaining the same y/y growth rate as the one in Q3. The latest reading was below the 5.4% growth expected in a Reuters poll. The Philippine economy hence expanded by 5.6% in 2024, accelerating slightly from 5.5% in 2023. The latest reading was below the government's target range of 6.0-6.5%.

Lending

The gross NPL ratio of the banking system was 3.27% at end-December, down from 3.54% at end-November, but slightly higher than 3.24% at end-2023. The latest reading is the lowest for 2024. In the y/y comparison, gross NPLs rose by 11.4% to PHP 500.3bn, whereas the gross total loan portfolio increased by 10.6% to PHP 15.3tn.

The allowance for credit losses rose by 5.2% y/y to PHP 480.7bn at end-December, slower than the gross NPLs. As a result, the NPL coverage ratio fell in y/y terms, to 96.08% from 101.74%. At the same time, the ratio increased m/m, from 93.21% in November.

The past due loans climbed 10.2% y/y to PHP 604.9bn at end-December, slightly slower than the gross total loan portfolio. The past due ratio hence edged down to 3.95% from 3.96%.

Exchange rate

The peso is trading at USD/PHP 58.109 at the time of writing, which compares with USD/PHP 57.857 on Feb 13, the date of the latest MB meeting.

The exchange rate of the peso, especially its impact on domestic inflation, is likely to be an important consideration for the MB in April, in our view.

Further reading

Press release after February 2025 monetary policy action

Schedule of monetary policy meetings

Highlights of MB meetings on monetary policy

Monetary Policy Report

• Next MPC meeting: Mar 11-12, 2025
• Current policy rate: 5.75%
• EmergingMarketWatch forecast: 5.75%

Rationale: The Monetary Policy Council continues to be nearly fully united in holding rates, but this unity will be tested in the coming months even if policy easing remains unlikely until H2. The coming rate setting in March had at one point be seen as the transition point in which the current wait-and-see stance transformed into an easing stance. Though a cut was always unlikely at the sitting in our opinion (because CPI inflation won't be updated due to the way the basket is revised), rate cut discussions were likely and these would eventually lead to a cut. If inflation peaked in Q1, then cuts were possible in Q2. However, the government's decision to not give clarity on the situation of power prices in Q4 put paid to this.

The government decided to keep the power price cap through end-Q3 and then decide later what to do about Q4. But the threat of power rising to the tariff (going from PLN 500/MWh to PLN 623/MWh) would push prices up some 13% and give a 0.7pp boost to inflation, as NBP and MPC chair Adam Glapinski loves to say at his latest pressers. That meant that inflation would no longer peak at some point in H1 2025 and then start slowing towards the target in later 2025, but could be near 5% at year-end. Glapinski has long said that for policy easing to start inflation would have to be on a downtrend and the projection would show the high probability inflation would continue slowing to the target.

We have always remained sceptical that the government would allow power to rise in Q4. Finance Minister Andrzej Domanski said just after the power legislation was presented that the 2025 budget has the money to extend the freeze in Q4, but that the government wanted to see where tariffs would go. The second part of the legislation mandates that power sellers present new tariff motions by end-April and to go into effect in H2 2025 (the current tariffs were originally to be in place for all of 2025). It is hard to say where tariffs will go, but Climate Minister Paulina Hennig-Kloska said Mon. that she doubted they would go all the way to PLN 500/MWh and so it was likely some sort of government intervention would be needed in Q4. We believe the government will not allow power prices to rise in Q4 as one of its main goals of late is to not allow power prices to rise and to instead find ways to lower them.

This means inflation is not set to jump in Q4, and so it should peak in Q1 or Q2. The MPC has indicated it will take a wait-and-see position through Q2, but should be in position to potentially cut rates in July, when the CPI and GDP projections will be updated after the next March version. This could open the door to cuts, but that will depend on inflation having peaked by end-Q2. If the MPC wants to get the July inflation reading, which should show a sharp slowdown due to the high base (though with uncertainty over power as well as natural gas tariffs), the MPC might put off cuts to September.

There are big unknowns, though. One is clearly the tightening of monetary conditions due to the appreciation of the zloty. The quantitative tightening that comes as the NBP lets COVID-era bonds expire is another factor. Though wage growth has remained high and the economy is to accelerate in 2025, there could be headwinds to growth in the form of tariffs and other factors. Developments here will thus be important. And fiscal policy is another issue. One factor possibly arguing for a September cut rather than a July one is that the draft 2026 budget should be out by the September meeting. That budget is to show a 1pp cut in the general government deficit, which would mark a big fiscal move and likely open the door to easing.

Archived video of all MPC press conferences

MPC's post-sitting statements

Latest council minutes

Latest NBP inflation report (November 2024)

Most recent MPC voting results

• Next MPC meeting: Mar 6, 2025
• Current policy rate: 45.0%
• EmergingMarketWatch forecast: Cut by 250bps
• Rationale: Annual inflation path trumps monthly volatility, supporting further cuts while real rates stay positive

Based on the latest rhetoric, we expect the CBT to continue its monetary easing at the March meeting, potentially implementing a 250bps reduction. In its assessment of monthly price developments, the CBT emphasized the deceleration trend in annual inflation, maintaining cautiously dovish undertones while reflecting a nuanced interpretation of monthly inflationary pressures. Furthermore, it highlighted contained core inflation trends as indicators of moderating structural demand pressures. The Bank characterized recent price dynamics as transitory and attributed monthly price increases to policy-driven calibrations. However, it acknowledged persistent supply-side risks-including global energy volatility, producer price disruptions, and backward indexation behaviours-which introduced an element of prudence to its outlook.

Turkey commenced the year under a revaluation framework calibrated to elevated prior-year inflation, triggering upward revisions across taxes, fees, and long-delayed public-sector pricing mechanisms-a reset enabling private-sector markups at the tactically critical year-start window. A paradigm shift emerged in 2025 with the minimum wage adjustment mechanism transitioning to expected inflation vs. prior retroactive anchoring, complemented by relative exchange rate stability over the past 12 months-a dynamic expected to persist in the near term, providing structural tailwinds to disinflation. Concurrently, benign global energy prices further bolstered disinflationary conditions. Against this backdrop, the CBT increased its year-end mid-point inflation forecast during the first inflation report meeting of the year to 24%. Indeed, following two upward revisions in August and November, that was the third upward revision totalling 10pps in less than three quarters, which, in our view, sounds like a challenge in CBT's credibility and forecasting capacity. Such reversals within a relatively short timeframe may also raise questions about consistency.

Looking ahead, we anticipate February's inflation to persist at 3.8% m/m, yielding cumulative Jan-Feb inflation of 9% and annualised inflation hovering around 41.1%-a threshold the CBT likely interprets as permitting resumption of monetary easing. In its January rate-setting meeting, the Bank explicitly prioritised the decline in annual inflation trajectory, signalling, in our assessment, a willingness to proceed with rate cuts as long as extreme monthly deviations do not occur. A 250bps cut to 42.5% would therefore maintain the policy rate at a strategic buffer above our 41.1% y/y projection in February-preserving positive real rates critical for containing entrenched expectations. Barring February data shocks, i.e. inflation overshooting 5% m/m, we assess a March easing resumption as the base case.

On the other hand, beneath this outlook lies a structural tension, in our assessment. Should Jan-Feb cumulative inflation reach 9%, attaining the CBT's 24% year-end target would demand a 1.3% m/m inflation average over the ten-month horizon-a threshold we deem arithmetically viable but structurally untenable. This arithmetic imperative underscores the asymmetry in baseline assumptions between market realities and official projections, in our opinion. Consequently, we reaffirm our year-end inflation forecast of 29.5%, marginally exceeding the upper bound of the CBT's target range.

Summary of January rate-setting meeting

MPC rate decision in January

Quarterly Inflation Report for Q1

Monetary policy strategy for 2025

• Next meeting: Mar 21
• Current policy rate: 5.00%
• EMW forecast: 5.00%

The BCCh's Monetary Policy Council held its benchmark interest rate at 5.00% in its January sitting and signaled that it was time to pause a rate cut cycle that had extended for the prior 18 months. Although the interest rate of 5.00% is above the 4.00% that is considered the nominal neutral, the recent and expected evolution of both the local and global variables relevant to monetary policy have significantly narrowed the space for further cuts, while not yet forming a scenario in which rate hikes look likely. This was manifested in the MPC's last post-sitting statement, which removed mention of future cuts and offered neutral guidance for the first time since the start of the cut cycle.

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Inflation finished 2024 at 4.5% y/y, above the 3.0% monetary policy target, and is expected to rise a little higher in the first half of 2025 due to the last step of an electricity tariff normalization process. Since the impact of the electricity adjustment on CPI inflation is transitory, it did not keep the MPC from continuing to cut as the gap between present inflation and the MPR narrowed. However, core inflation has been on the rise, and the balance of external risks to inflation got even tilted to the upside over the last three months. Chile-based forecasters still expect inflation to converge to the 3.0% target within the two-year policy horizon, but the consensus has been getting weaker.

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The real economy working with a negative output gap had been one of the drivers behind the MPR cuts in the second half of 2024, but the latest economic activity print can change the narrative. Since there was a big surprise on the upside to end a quarter in which the economy had generally performed a bit better than expected, the output gap is likely to be revised into zero or positive. With a neutral gap and a neutral real MPR, the performance of the real economy becomes less of a driver for cuts. There are still some elements of concern, such as the prolonged weakness of lending activity and job creation, but these are issues that the MPC will probably argue will be gradually resolved as the impact of prior MPR cuts sets in.

The latest global developments are a source of upside risk to inflation in the short term, but potentially of slower growth as well, which would add deflationary pressure over the medium term. The weakness and volatility of the CLP and the imposition of tariffs by advanced economies are the two main factors that can contribute to an increase of inflation in the near term. However, the MPC has been driving the point that slower global economic growth in general, and slower growth in China in particular, have the potential to depress Chilean growth prospects as well, with subsequent deflationary effects.

Our view is that the MPC will be on hold mode at least until the start of the second half of the year if current trends remain largely unchanged, which matches local consensus forecast polls. The MPC is unlikely to retake cuts as long as inflation sits above 4.0% and the balance of risks to inflation is tilted to the upside, even if economic activity disappoints in the first half of 2025. Rate hikes are also unlikely, unless there is a big risk-off event that puts upward pressure on rates across the EM spectrum.

• Next MPC meeting: Jan 31
• Current policy rate: 9.50%
• EmergingMarketWatch forecast: 25bps cut
  

BanRep is expected to maintain a cautious approach to interest rate cuts in the upcoming sitting, marking the final session for the current board before two members get replaced. This will be the last meeting for the hawkish board members Roberto Steiner and Jaime Jaramillo, who were part of a board majority that consistently emphasized the importance of fiscal stability, and in recent years guided monetary policy according to the risks posed by the current government's fiscal policy approach. We expect their final vote to reflect their hawkish stance. President Gustavo Petro has already appointed their replacements.

During the last meeting, the board surprised the market by implementing a 25bps rate cut, marking a shift to a more gradual pace compared to the previous string of cuts of 50bps. The decision was primarily influenced by fiscal risks, identified as key factors requiring slower easing. These risks were linked to the exchange rate depreciation, uncertainty surrounding the minimum wage increase, and rising regulated prices.

Conditions remain unchanged, so caution is expected to prevail at this meeting. New factors, including the Fed's pace, the diplomatic crisis between Colombia and the US, and emerging uncertainties surrounding the 2025 budget linked to the declaration of Internal Commotion, add complexity to the scenario. Analysts polled by BanRep forecast a 25bps cut for the upcoming sitting.

Overall, we believe the most probable scenario is that the board will opt for another 25bp rate cut during the first meeting of 2025. With new members joining in February and participating in their first policy decision in March, the outlook could change if they show greater alignment with the government's priorities, as the finance minister suggested. However, uncertainty remains, as BanRep members have expressed confidence that the central bank will uphold its independence and constitutional mandate.

• Current policy rate: 4.50%
• Next monetary policy meeting: Apr 8, 2025
• Expected decision: Hold

Inflation and geopolitical risks were the major factors cited by the MPC to keep the policy rate unchanged in the past more than a year and it made the same decision on Feb 24 maintaining the policy rate at 4.50%. After achieving relative stability with the ceasefire agreements reached with Hezbollah and Hamad, the inflation remains the major factor on which the start in monetary easing would depend. And governor Yaron recently confirmed that inflation will remain a major consideration and again pointed to supply-side shortages as factors for inflation that is also preventing a stronger economic recovery. Yaron repeated again that the baseline scenario is for 1-2 rate cuts in H2 when inflation approaches the 1-3% target range and seemed to give more weight to delay in the rate cuts than earlier easing of the monetary policy when commenting on the alternative scenarios. We still think that it is possible the easing to start earlier if there are no negative inflation surprises and the calm is maintained. However, this is more likely to take place in the May meeting when more information about inflation developments would be available. For now, Yaron sees the current rate appropriate for pulling inflation down towards the target and also supporting the economic recovery and the MPC did not change the guidance still stressing on the need to first look at the stability of the financial markets and to make efforts to reduce risks along with pulling inflation down to the 1-3% target range and supporting economic activity.

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Inflation did accelerate by 0.6pps to 3.8% y/y in January but this was largely due to increases in taxes and regulated prices and the rate was below the announced expectations of the MPC for close to 4% y/y. The spike was due mainly to increase in some taxes and in regulated prices. It is possible though the January reading not to have exhausted the impact from the above moves and inflation to keep speeding up in the following months. Inflation has been above the 1-3% target range in the past seven months and is expected to exceed 3% y/y in H1. The latest inflation expectations, one of the major considerations the MPC is looking at when deciding on the policy rate, pointed to moderation in the inflation environment. The rate-setters see supply constraints easing to respond slower than demand. The BoI still sees inflation forecast tending to the upside. It says geopolitical developments and their impact on economic activity, prolonged supply constraints, volatility of the shekel, and fiscal developments are pro-inflationary risks. On the other hand, economic activity slowed to below-expected 2.5% saar in Q4, still below pre-war levels. The distance to the trend is largely due to supply limitations, which have been affecting several industries, of which construction was hardest hit. Private consumption is strong, however, but we think that it should moderate due to the tax rates and also increase in foreign vacations, which were lower during the war and pumped up domestic private spending.

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: 15.25%
• Next monetary policy meeting: Mar 7
• Expected decision: hold

We expect the NBK to leave the base rate on hold at 15.25% at its Mar 7 meeting following a similar decision in January. Back then the bank did say it will consider monetary tightening once it updates its macro forecasts in March. It should be noted that CPI inflation rose to 8.9% y/y in February (from 8.6% y/y) and domestic reform plans imply more prolonged inflationary pressures. Specifically, this concerns the liberalisation of utility tariffs, fuel price hikes, and the expected VAT rate hike as a more medium-term prospect.

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At the same time, we remind that the NBK's data showed significant moderation of households' inflation expectations in February (12.4%, from 14.6%). The result requires caution due to general likelihood of volatility, but could still influence the bank's near-term actions. In addition, the Russian ruble's strengthening against the US dollar has also allowed the tenge to appreciate. The average USD/KZT rate dropped below 503 today, having previously exceeded the 520 mark for some time. This month's quarterly tax payments are yet to be reflected and the NBK is set to make notable FX sales as part of its strategy to mirror gold sales, so there is scope for moderate optimism about exchange rate dynamics.

Importantly, we recall that President Tokayev's February address insisted there is no scope for the NBK to be independent right now. He instructed the bank to work in close cooperation with the government, which the NBK was quick to agree to despite rhetorical claims of continued independence. In this context, our concerns about political pressure on the central bank have increased and we suspect it will be pushed further to support the president's growth agenda. This includes efforts to make corporate lenders finance businesses more actively, which makes the base rate a key factor yet again.

All in all, the NBK appears most likely to opt for an on-hold decision as a means of balancing inflation management and political goals for now. A rate hike would come as a sign of utmost caution and could possibly signal that the bank intends to defend its positions, though we believe this is less probable currently. Assuming lack of sudden shocks in the next few weeks, leaving the base rate on hold seems most convenient as the NBK will have time to monitor the impact of higher fuel and utility prices among other factors.

• Next policy meeting: Apr 17
• Current policy stance: 2.75%
• Our forecast: Hold
• Last decision: 25bp cut (Feb 25)
• Rationale: After BOK cut key rate in February on GDP growth concerns, it will remain wary of further easing due to USD/KRW exchange rate

We expect the Bank of Korea to keep the key rate on hold at 2.75% in April, after deciding to cut it by 25bps in February. Forward guidance from all six BOK members in January pointed to a rate cut in the next three months, which already happened, hence we see limited for further monetary policy easing in the short term.

In our view, further concerns over global GDP growth slowdown due to tariffs imposed by the US on its trading partners could fuel further rate cuts. South Korea would be particularly affected if such tariffs are imposed on automobiles, semiconductors or pharmaceuticals. The tariffs announced so far such as the 25% tariffs on aluminium and steel products are unlikely to seriously impact the Korean economy and thus will be largely ignored by policymakers, in our view.

Another crucial thing to watch in the coming months would be the approval of a supplementary budget to support growth. BOK governor Rhee has stated multiple times that he thinks that fiscal stimulus is more appropriate to boost growth at the present moment rather than monetary policy. However, if the prospects for approval of a supplementary budget in the next few months wane, the BOK may have to ease policy at a sharper pace.

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Economy braces for slowdown in 2025 dragged down by weak construction activity

The Korean economy will almost certainly slow down in 2025 dragged down by weakening export momentum, sluggish consumption demand, and continuing slump in the construction sector. Most recently, all industry production rose by 1.4% y/y in December as the robust growth in industrial production by 5.3% y/y was offset by an 8.3% y/y decline in construction output. The latter remains depressed due to weak construction orders and poor construction sentiment following the failure of some construction firms in early 2024.

Meanwhile, exports rose by 16.0% y/y in Feb 1-20 on the Lunar New Year effect, after the 10.3% y/y dip in January. On the bright side, the sentiment shock from the recent martial law chaos might be actually smaller than previously feared as consumer sentiment rebounded in January, while Manufacturing PMI rose above the 50-point mark in January.

Inflation accelerates to 2.2% y/y in January, while household lending remains subdued

CPI inflation accelerated to 2.2% y/y in January, reaching the highest level in 6 months due to the uptick in transport prices and the weakening of the exchange rate. Nevertheless, demand-side pressure on prices remains low and expected inflation fell to 2.8% y/y in January from 2.9% y/y in December in the latest consumer survey carried out by the Bank of Korea. That said, inflation may remain elevated in the following months as importers adjust their prices due to the won's depreciation.

When it comes to household lending, which was the main concern for the BOK in H2 2024, growth remained subdued at KRW 0.5tn m/m in January. Household lending has slowed down considerably after banks started to tighten rules and raise rates on mortgage loans in late 2024.

Thus, as both the low CPI inflation and the slowdown in household lending allowed the BOK to cut the key rate in February, we think that the exchange rate pressure will remain the key concern in the next few months. The current level of USD/KRW exchange rate remains well above KRW 1,400 per dollar which negates the recent positive developments in inflation and household lending that could have enabled the BOK to ease more aggressively. Moreover, the latest 25bp rate cut will surely put further pressure on the exchange rate, suggesting that BOK will remain on hold in the short term in order not to risk further depreciation of the won.

Further reading

Last MPC press release

Calendar of MPC meetings

• Next policy meeting: March 6, 2025
• Current policy rate: 3.00%
• Our forecast: Hold
• Last decision: Hold (January 22)
• Rationale: Current monetary policy stance seen supportive of growth amid contained price pressure

We expect Bank Negara Malaysia (BNM) to leave its overnight policy rate (OPR) unchanged at 3.0% next week to support economic growth amid stable price pressure. The central bank on January 22 maintained status quo on its key rate for the tenth consecutive meeting, citing muted inflation and the need to sustain growth momentum. The current monetary policy stance is considered supportive of the economy, with the benchmark interest rate remaining unchanged since June 2023.

Inflation environment

CPI inflation stayed flat at 1.7% y/y in January, led by a softer gain in food, housing and utilities cost. Underlying price pressure also remained contained, although core inflation picked up to 1.8% y/y from a near three-year low of 1.6% y/y.

Both headline and core inflation averaged 1.8% in 2024, down from 2.5% in the previous year. BNM projects inflation to remain "manageable" in 2025, amid easing global cost conditions and the absence of excessive domestic demand pressures. Additionally, it has maintained an optimistic outlook on the planned rationalization of RON95 subsidy, set for mid-2025, anticipating a limited impact. It is noteworthy that PM Anwar has assured that 85% of the population would continue to benefit from the subsidy.

While BNM has not provided an official inflation forecast, the government estimates inflation will rise to 2.0%-3.5% this year. Factors that could drive CPI higher include the removal of the blanket petrol subsidy, an increase in excise tax on sugary drinks, higher electricity tariffs from July, an expanded sales and services tax, mandatory Employees Provident Fund (EPF) contributions for foreign workers, and wage-price pass-through effects from the minimum wage hike.

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GDP growth

BNM forecasts economic activity to remain robust in 2025, following a sharp rebound in GDP growth to 5.1% last year from 3.6% in 2023. Domestic expenditure is seen a key growth driver, supported by strong household spending amid employment and wage growth, as well as increases in the minimum wage and civil servant salaries. Further, exports are expected to maintain an upward trend, driven by the global tech upcycle, continued expansion in non-E&E goods, and higher tourist spending.

While BNM has yet to release its GDP growth forecast, the government projects growth at 4.5%-5.5% in 2025, aligning with the IMF's 4.7% and World Bank's 4.5% projections for this year.

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Exchange rate stability

BNM is of the view that the ringgit's movements are largely driven by external factors, particularly uncertainty surrounding U.S. trade policies following Trump's election and the Federal Reserve's increasingly hawkish stance. The local currency has experienced periods of volatility since the U.S. presidential election. After weakening sharply against the U.S. dollar in the weeks following November 5, the ringgit has regained some ground since mid-January. Overall, the USD/MYR has increased by 1.7% since the U.S. election. Before the polls, ringgit had gained 9.5% against the U.S. dollar since February, when the local currency fell to its lowest since the 1997 Asian Financial Crisis.

Despite recent fluctuations, BNM remains optimistic about the ringgit's outlook in the coming months. The central bank expects the local currency to strengthen, supported by narrowing interest rate differentials between Malaysia and advanced economies, alongside the country's positive economic prospects and ongoing structural reforms.

Conclusion

All in all, we expect BNM to leave the OPR unchanged on March 6 and throughout the rest of 2025, in line with the consensus forecast. This reflects the central bank's focus on balancing economic growth with managing anticipated inflationary pressures. While BNM has ruled out adjusting monetary policy to support the ringgit, maintaining the key rate is essential to help ease pressure on the local currency.

Useful Links

Previous OPR decisions

Meeting schedule

• Next MPC meeting: Apr 7, 2025
• Current policy rate: 6.50%
• EmergingMarketWatch forecast: Hold

Rationale: NBR Governor Mugur Isarescu said in the recent press conference for Inflation Report presentation that local currency depreciation shouldn't happen in the current context, with high uncertainties in the domestic political scene and market tension. A policy rate cut would cause such a depreciation, he added, suggesting that the key rate will probably stay put until tension and uncertainties fade. Isarescu admitted that the central bank intervened in the market to keep the fx rate stable and it would probably continue to do that in the following periods, being prepared for potential large capital outflow. In addition, a potential EU-USA trade war significantly hikes risks to the current inflation outlook and a tighter stance would be wiser.

Data Download

As recalled, the NBR kept the key rate at 6.5% in its first two MCP meetings in 2025, on Jan 15 and on Feb 14. The following meeting is scheduled on Apr 7, during the presidential election campaign, when political uncertainties would very likely peak. The situation is unlikely to stabilize until the next MPC meeting (May 14), just ten days after the presidential election date. Also, Isarescu wants to wait until the summer to assess the effects of government's fiscal tightening on the budget execution. Therefore, we see a policy rate cut idea on the central bank table no sooner than H2.

The inflation interrupted moderation trend in the last months of 2024 and even if base effects would resume the slowdown, the central bank sees it on a higher path than projected in the November 2024 Inflation Report, while revising upwards the end-year forecast. Moreover, the NBR sees considerable uncertainties and risks on the inflation outlook coming from the fiscal policy, labour market conditions and wage dynamics, price developments in energy, food and oil markets.

Other upside pressure on inflation outlook comes from a higher-than-projected food inflation caused by bad weather conditions in 2024, oil price developments and the expiration or extension of the energy price cap schemes this spring. On the external front, markets turmoil, possible EU-USA trade war and persisting geopolitical tension in the Middle East and Ukraine mirror low predictability in financial markets and high risks of other disruptions in commodity markets.

To remind, the NBR cut the policy rate twice in 2024, in July and August, but that was not a start of a monetary easing cycle. The central bank took the opportunity of the inflation moderation trend, which signalled consolidation. Yet, several risks to the inflation outlook have materialized later, like intensification of geopolitical tensions, a stronger deficit widening and bad weather conditions that kept the food inflation high. Hence, inflation forecasts were revised upwards and risks to the inflation outlook became considerable.

• Current policy rate: 21.0%
• Next monetary policy committee meeting: March 21
• Expected decision: hold

The Feb 14 board meeting produced no surprises as the CBR remained on hold and reiterated its view of the situation: current monetary policy is tight enough to bring down inflation if fiscal parameters are met, but this will require a longer period of high rates. So far the effect is seen mainly in the deceleration of bank lending, but the CBR believes this will eventually reduce inflation.

The CBR preserved a mild tightening bias, saying it will assess the need for another rate hike at forthcoming meetings, but it looks pretty certain that in the absence of new shocks this is the peak of the tightening cycle. Rate cuts will come to the agenda later this year, but we think that the CBR will definitely remain on hold at the (non-core) meeting on March 21. The timing of the first rate cut remains very uncertain, given the potential for both positive and negative external shocks depending on peace talks.

Inflation developments in January were in line with expectations with headline CPI inflation rising to 9.9% y/y from 9.5% y/y in December. Higher regulated price adjustments had a significant contribution, while core inflationary pressure seems to be abating, which is seen also in weekly data. We expect this trend to accelerate given the 10% ruble appreciation in the first half of February on positive expectations of a peace deal. In these circumstances CBR's new forecast for year-end inflation of 7.0-8.0% y/y looks realistic and may even turn out too conservative, bringing forward the first rate cut.

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This said, pro-inflationary factors remain in place, especially strong domestic demand, labour shortages, high budget spending. Those led to higher than expected GDP growth in Q4 2024 and most probably also in January 2025, but the CBR also said it sees first signs of slowdown. The EconMin expressed concerns that the economy may cool down too quickly as a result of the high interest rates. It seems the CBR also starts to worry about this possibility as it eased requirements for mortgage lending, together with the Feb 14 rate decision, saying the segment has already cooled down. At the same time, the CBR tightened requirements for bank lending to large companies with a high debt burden. The latter has been discussed for some time as the cost of these loans is often subsidized by the state and they are much less sensitive to key rate hikes.

Next MPC meeting: Mar 20, 2025

Current policy rate: 7.50%

EmergingMarketWatch forecast: 7.50%

The MPC delivered the expected interest rate cut of 25bps at its rate meeting in January but it seems increasingly clear that the space for more easing is quickly disappearing. South Africa ended the year with an inflation rate of only 3.0% which is the lower end of the target band. SARB's monetary policies have achieved a reduction in the inflation rate of more than 4.8pps from the peak inflation rate of 7.8% in July. The central bank is now arguing in favour of a reduction in the wide inflation target band of 3.0-6.0% and anchoring expectations closer to the bottom of this range.

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Despite this undoubted achievement and the prospects for the inflation rate to remain anchored at the currently preferred rate of 4.5% over the course of the policy horizon, only three of the MPC members voted to reduce the policy rate in January and two voted for a hold. The MPC voiced its concerns about the upside risks on the inflation outlook, the unprecedented global uncertainty, the fuel and electricity price trajectory and their potential negative implication for domestic inflation.

These concerns have started to materialise in full force since the Jan 30 MPC meeting. The risks on the rand are not looking great, fuel prices have increased in both January and more substantially in February and the electricity tariff will increase 12.7% as of Apr/Jul (though considerably below the 36% requested by Eskom). Even the gains from the establishment of the GNU and the political stability it brought, taking investor confidence along, are slowly starting to erode.

Overall, these risks do not bode well for South Africa and we see as very likely that the three who voted for a cut in January could be easily swayed towards the more cautious camp.

Monetary Policy Committee Statement, Forecasts and Assumptions

Monetary Policy Review

• Next Policy Meeting: Mar 26
• Overnight Policy Rate (OPR): 8.0%
• Previous Decision: Hold (Jan 29)
• Our Forecast: Cut, 25bps
• Rationale: Benign inflation provides sufficient headroom, GDP growth emerges as concern

Commensurate with our view, the Central Bank of Sri Lanka (CBSL) held its overnight policy rate (OPR) steady at 8% on Jan 29, during its first MPC meeting of 2025. We remind that CBSL in its Nov 27, 2024 meeting made a landmark decision to unify rates and establish the OPR. This unified rate replaces the dual system and now serves as the primary monetary policy tool. Alongside this change, the Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) have been aligned at 7.5% and 8.5%, respectively, maintaining a margin of ±50bps around the OPR. This structural shift reflects a more streamlined and accommodative policy approach, aimed at supporting the economy amidst persistent deflation and subdued activity levels. We expect the CBSL to cut the key rate by 25bps in March, in its next policy meeting, given the persisting deflationary trend and potential slowdown in the economy, owing to global headwinds.

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Inflation Trends

Sri Lanka's inflation dynamics have undergone a sharp shift, with deflation taking centre stage. In December, the Colombo Consumer Price Index (CCPI) recorded a 1.7% y/y decline, driven by falling prices for fuel, electricity, and gas. Meanwhile, the NCPI contraction deepened to 2% y/y in December. Short-term deflationary pressures are expected to persist, although inflation is projected to stabilise around the 5% target in the medium term. Core inflation, a measure of underlying demand, has also moderated significantly. The CBSL anticipates inflation will remain negative in the near term but turn positive by mid-2025 as fuel and transport costs stabilize and food prices recover, according to the latest monetary policy statement.

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Economic Growth

Sri Lanka's economy is gradually regaining momentum, with real GDP growing by 5.5% y/y in Q3 2024, accelerating from 4.7% y/y in Q2. The industrial sector spearheaded this recovery, posting a robust 10.9% y/y expansion, supported by utilities, chemicals, metals, and wood products. Agriculture experienced a 3.0% y/y growth, while the services sector reported growth at 2.6% y/y, with tourism-related industries such as accommodation and insurance showing stronger performance. The economic rebound has been bolstered by reforms under the IMF program and a robust tourism recovery, with 38% growth in tourist revenues in 2024. Despite these gains, delays in IMF fund disbursements could pose challenges in maintaining growth momentum. Q4 growth is likely to have surpassed expectations. Meanwhile, the government anticipates over 4% growth in 2025. However, global headwinds such as the threat of tariffs from the US, the Federal Reserve's policy moves and a potential slowdown in Europe heighten downside risks to growth.

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External Sector

The external sector has shown mixed outcomes. The merchandise trade deficit widened significantly in December. This was the largest trade deficit since January 2022, reflecting strong import growth. The trend is likely to persist in the near term as the government withdraws restrictions on vehicle imports. Meanwhile, exports continue to reflect gradual growth. An increase in tourism revenue and workers' remittances helped improve the external current account. The Sri Lankan rupee appreciated by 10.7% in 2024 but recorded a 2.0% YTD depreciation in early 2025. The successful completion of external debt restructuring, except for a small portion, in December 2024 has bolstered the country's external outlook. Gross Official Reserves (GOR) stood at USD 6.1bn at end-2024, including a renewed Bilateral Currency Swap facility with the People's Bank of China for three years.

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Outlook

The CBSL is likely to cut its rate in March, given expectations of economic activity moderating. The subdued inflation outlook will provide CBSL sufficient headroom to cut interest rates to ensure economic momentum is not lost. Further, uncertainties such as delays in fund disbursements, geopolitical risks, and fiscal policy shifts following parliamentary elections may influence future policy decisions. The CBSL is expected to remain cautious, balancing its focus on economic recovery with maintaining financial stability.

Further reading

Last MPC decision

Calendar of MPC meetings

• Next MPC meeting: Apr 30
• Current policy rate: 2.00%
• EmergingMarketWatch forecast: Hold
• Rationale: MPC statement of Feb 26

We think that a hold decision is likely at the next meeting of BOT's Monetary Policy Committee (MPC) that is scheduled for Apr 30. On Wednesday, the MPC voted 6 to 1 to reduce the policy interest rate by 25bps to 2.00%. One MPC member favoured maintaining the key rate. The cut was a moderate surprise as consensus polls had indicated a hold decision, although a certain number of respondents had made correct predictions. Earlier this week, the cabinet sent a letter to the BOT requesting an interest rate cut.

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The key rate cut on Wednesday is intended to align financial conditions with the economic and inflation outlook, as well as financial stability; and to better address rising downside risks to the economy, the MPC said. The MPC member who voted to keep the policy rate unchanged placed greater emphasis on preserving monetary policy space to deal with heightened uncertainties in the future.

The MPC aims at maintaining price stability, supporting sustainable growth and preserving financial stability. It hence considers the lower policy rate consistent with the current assessment of the economic outlook and robust to risks in the future. The MPC also said that the weaker economic outlook is caused by structural problems that require policies to enhance economic competitiveness and boost potential growth.

Economic growth

The MPC said that the economic growth is projected to be slower than anticipated, due to structural impediments in manufacturing production and competition from imported goods, in spite of support from domestic demand and tourism. The MPC said that the Thai economy faces heightened risks from trade policies of major economies. In December, the MPC had forecast GDP growth of 2.7% in 2024 and 2.9% in 2025. We remind that fourth-quarter economic growth was slower-than-expected, and the GDP rose by 2.5% in 2024, accelerating from 2.0% in 2023. With regard to 2025, the MPC now expects that the GDP will increase by 2.6%.

The MPC expects the services sector to expand. Domestic demand is projected to increase, driven by private consumption, whereas goods exports are likely to grow on the back of technology products and agro-manufacturing products. According to the MPC, there is a need to monitor the manufacturing sector that could continue to face pressures. In particular, these pressures include intense competition for the SMEs, as well as the effects of trade policies of major economies on the Thai economy.

Inflation

The headline CPI increased by 1.32% y/y in January, accelerating from 1.23% y/y in December. Headline inflation has been within the target range of 1-3% for two consecutive months.

The MPC expects headline inflation to stabilize around the lower end of the 1-3% target band due to supply factors, namely the expected downward trend in global crude oil prices, as well as structural factors like intense price competition from imported goods. According to the MPC, such an inflation rate is not indicative of future deflation but instead helps ease high costs of living and business costs. Medium-term inflation expectations continue to be within the target range. There are downside risks to inflation stemming from the global crude oil prices outlook and potential domestic energy price subsidies.

Lending

Financial conditions continue to be tightened, the MPC said. It reported that there are signs of stabilisation of loan growth and credit quality. Nonetheless, SME loans, especially in industries with structural problems, continued to decline. Retail loan growth slowed down partly because of slower income recovery and elevated debt burden. The opinion of the MPC is that the lower policy rate will help ease financial conditions without impacting long-term financial stability risks. There is also a need to monitor the outlook of loan growth and credit quality of vulnerable groups, the press release said.

Exchange rate

The Thai baht is trading at USD/THB 33.811 as of the time of writing, which compares with USD/THB 34.26 on Dec 31.

The volatility of the baht against the US dollar rose primarily due to uncertainties in policies of major economies, the MPC noted on Wednesday.

Further reading

MPC decision of Feb 26

Schedule of MPC meetings

Edited minutes of MPC meetings

Monetary policy report

• New rate: 14.5%
• Inflation keeps accelerating
• Next rate decision: Mar 6

As generally expected, the central bank (NBU) on Jan 23 increased the key policy rate. This time the hike was more significant than in December, by 100bps to 14.5%. The second key rate increase since mid-2022 was due to faster than anticipated inflation acceleration. The NBU also increased its interest rates on overnight certificates of deposit to 14.5%, on three-month certificates of deposit to 17.0%, and on refinancing loans to 17.5%.

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Headline CPI inflation accelerated to 12.0% in December from 11.2% y/y in November. What is more, the NBU estimated that inflation kept accelerating also in January and forecast that it would peak only by mid-2025. Accordingly, the NBU said it would increase its key policy rate further to more than 15% in Q2 2025 and then cut it to 13% by end-2025. By then, the NBU now expects inflation to abate to 8.4%, up from the 6.9% forecast last October.

The NBU said high inflation was increasingly supported by fundamental factors, due to higher spending on raw materials, power and wages - the latter because of the personnel shortage triggered by military mobilisation and emigration. Disinflation in H2 2025, the NBU forecast, would be supported by better harvest, improvements in the energy sector, and a narrower fiscal gap. But in any case, much will depend on the course of Russia's war against Ukraine.