• 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: Nov 6, 2024
• Current policy rate: 10.75%
• EmergingMarketWatch forecast: 50-bp hike (to 11.25%)

Analysts polled by the BCB raised their inflation expectations for end-2024 to 4.55% y/y, according to this week's Focus Report, surpassing the 4.50% ceiling allowed by the +/-1.50-pp fluctuation band around the BCB's 3.00% inflation target. This was the first time inflation expectations have breached the upper tolerance band this year. The risk of missing the target has thus strengthened the outlook that the Copom will raise the Selic rate by 50bps to 11.25% at its next policy meeting on Nov 6, accelerating the pace of monetary tightening after it began its cycle on Sep 18 with a 25-bp hike.

Higher food and electricity prices are driving inflation higher. The drought is expected to continue impacting official October inflation, but should ease in November as the utility Aneel lowered the electricity tariff flag from red level 2 to yellow. The December tariff flag remains uncertain, but the likelihood of an increase is low given the forecast of fresh rain across the country. While relief in the final two months of the year suggests the inflation target should be met, we believe that inflationary pressure from supply constraints, combined with the de-anchoring of inflation expectations, will likely prompt a larger Selic rate hike by the Copom.

Another factor being closely watched by the Copom is services inflation. Cited as one of the elements tipping the inflation risk balance upward in the Copom's latest minutes, the services sector typically experiences growth toward year-end due to holiday demand. Amid strong economic activity and a robust labor market, year-end pressures could drive inflation above expectations, risking a missed inflation target for 2024 and adding continued pressure going into 2025. Next year, the inflation framework will shift from a calendar-year target to a continuous 12-month rolling target. Services inflation is likely to remain a key focus for the Copom and will sustain the upward risk balance, requiring more hawkish action.

Fiscal policies have increasingly contributed to the de-anchoring of inflation expectations, which are repeatedly noted by Copom members as a concern. After determining that revenue-driven fiscal adjustments have reached their limit, the government has pledged to review expenditures and introduce structural measures to address mandatory government spending. These measures are expected to be presented between this week and next. However, Finance Minister Fernando Haddad said that President Lula da Silva has yet to decide on the announcement date. In our view, any further delay could exacerbate fiscal uncertainties and harm the credibility of the fiscal framework, especially as the measures will require congressional approval and the government aims to secure approval for at least some of them this year. Congress faces a busy schedule for the rest of the year, with topics including parliamentary amendments, the 2025 budget, and tax reform regulations, after being largely inactive for nearly two months due to the pressure from the October municipal elections.

Overall, while the drought may ease inflationary pressures in the final months of 2024, we expect inflation to remain close to but below the 4.50% target ceiling. However, the persistent de-anchoring of expectations continues to pressure the Copom to adopt a more hawkish stance to steer expectations back toward the 3.00% target, and that increases the chance it will raise the Selic by 50bps to 11.25% at its Nov 6 meeting. Effective fiscal measures from the federal government will be crucial to curbing pressure for a prolonged tightening cycle. However, we expect these measures to have a practical impact on inflation expectations only in 2025, when it will be possible to assess the budgetary effect of the measures and the likelihood of their approval. Consequently, we expect the Copom to raise the Selic by an additional 50bps at its final meeting of the year (Dec 11). Depending on the effectiveness and reception of the fiscal measures by Congress and the market, we do not rule out further Selic hikes in early 2025, when the current BCB director of monetary policy, Gabriel Galípolo, will take over the BCB as governor and might be looking to burnish his credibility.

• Next MPC meeting: Nov 7, 2024
• Current policy rate: 4.25%
• EmergingMarketWatch forecast: 25bp cut

Rationale: The CNB did not surprise and delivered another 25bp cut in September. The language of the post-meeting statement eased a bit on inflation risks, and it did not include any wording on a pause or interruption of the current monetary easing cycle. CNB governor Ales Michl said that interest rates remained at a restrictive level, and a hawkish stance would be preserved. This time, the decision was not unanimous, as the single dissenting vote favoured a 50bp cut. Unsurprisingly, it was Tomas Holub, who already said he would consider a cut bigger than 25bps at this meeting. He has implied a similar action at the MPC meeting in November, as he keeps arguing that the CNB should take a more forward-looking approach. However, it will not matter in the long term, as Holub has confirmed he will not seek a second term on the CNB board, which means the next MPC meeting will be his last, as his term expires on Nov 30.

Michl said that the argument in favour of a 25bp cut was that there were inflation risks that could still materialise, like a stronger wage growth, a boost in fiscal spending, persisting inertia in service price growth. It was a view shared by other board members, even though some admitted that these risks have not materialised thus far. It is why the board preferred to consider carefully rate cuts, as core inflation remained above the 2% target. Meanwhile, Holub's argument in favour of a 50bp cut was that inflation had remained close enough to the 2% target, implying that risks had not materialised. Interestingly, Jan Frait also considered a 50bp cut, but his main concern was market reaction that could lead to undesirable CZK depreciation, which is what changed his mind. We consider this a good example of group thinking, which unfortunately appears to be more frequent in this makeup of the board than we would prefer.

Economic data has not weighed the scales towards either group. While headline CPI inflation accelerated to 2.6% y/y in September, it was primarily due to food prices, and core inflation remained only slightly above the projection, by 0.1pps in Q3 2024. The CNB forecasting model has been consistently unable to predict food price fluctuations, but it has been relatively solid on core inflation, and there the deviation is not big. Early data implies that we will see higher CPI prints in Q4 2024 as well, possibly close to 3% y/y, but we expect core inflation to remain in line with projections. Retail sales have continued to recover, but we see a base effect in play that will be phased out in Q4 2024, when we anticipate a much weaker performance. Signals from main trade partners are gloomy, as Germany is now expected to have a stagnant economy in 2024 and only a mild improvement in 2025. This has been hurting Czech exporters, who in turn have kept nominal wage growth contained, as they cannot afford to raise labour costs too fast. The public sector is, in fact, the only place where wages will rise steadily in 2025, so there is some inflation pressure from that side.

Given that economic signals remain discouraging about a strong recovery, we would argue that the CNB board will deliver at least one more 25bp cut in November. As we mentioned above, we expect core inflation to remain low, given that headline prints have been higher due to volatile prices. Still, inflation moving closer to the upper end of the tolerance band (2%+/-1pp) could increase the odds of a pause in December, so the policy rate could end 2024 at 4%. Regarding 2025, we expect that a slow economic recovery will likely push the CNB into loosening a bit more, possibly bringing the policy rate to 3.25% before the current easing cycle ends. However, there may be several pauses, which means we may see the end of the easing cycle in H2 2025. All in all, we expect that demand will remain relatively low, preventing inflation risks from materialising.

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Further Reading:

CNB board statement from latest MPC meeting, Sep 25, 2024

Post-meeting press conference, Sep 25, 2024 (in Czech)

Q&A after the latest MPC meeting, Sep 25, 2024

Minutes from the latest MPC meeting, Sep 25, 2024

Monetary Policy Report, August 2024

Macroeconomic forecast, August 2024

Meeting with analysts, Aug 2, 2024

CNB board profile

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

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

• Next MPC meeting: Oct 17, 2024
• Current policy rate: 27.75%
• EmergingMarketWatch forecast: 27.75%

The MPC will hold a regular rate-setting meeting on Oct 17, and we think the the MPC will decide to hold the rates again. While inflation came significantly better than expected in each month between March and July, it quickened in August and September reflecting the fuel and energy price adjustments. Core prices quickened in August and remained elevated at 25% y/y in September, pointing towards strong inflationary pressures in the economy. Further, the rising tension between Israel and Iran clouds the outlook for commodity prices, especially oil prices. Taking the global uncertainty, the elevated inflation and Egypt's increased reliance on portfolio inflows, we think the MPC will hold the rates, which will give it more time to assess the second-round effects from the domestic price hikes. There are still two more MPC meetings scheduled for November and December, so we may see some monetary in the closing months of the year, but we think it will be gradual and delivered through minor cuts.

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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, and we think the MPC will maintain a tight stance over Q4 because consumer inflation remains broad-based, reflecting FX pass-through, surging food prices, supply line disruptions, and robust monetary expansion.

Monetary Policy Committee Statement

Monetary Policy Review

Monetary Policy Committee Meeting Schedule

• Next MPC meeting: Nov 19, 2024
• Current policy rate: 6.50%
• EmergingMarketWatch forecast: Hold
• Rationale: NBH increasingly concerned with financial market volatility, downward pressure on forint

The MPC shifted its caution up a notch with its October rate decision, announcing a pause of the rate-cut cycle. Previously, the MPC was expected to implement at least one more 25bps rate cut by the end of this year. National Bank of Hungary (NBH) deputy governor Barnabas Virag had started to prepare the ground for the monetary policy shift some weeks before the October MPC meeting, warning that rate cuts should not be expected not only for October, but also for the following months, because of geopolitical tension and financial market volatility. Uncertainty regarding the policy loosening path of major central banks has increased as well, Virag noted. The NBH seemed specifically concerned with the renewed downward pressure on the forint lately and we think this was the primary reason for putting the rate-cut cycle on hold in October. NBH deputy governor Csaba Kandracs also highlighted higher risk aversion towards emerging markets during a background discussion after the October MPC meeting and stressed that the NBH was closely monitoring the forint exchange rate, reiterating earlier NBH research that the exchange rate pass-through to inflation has increased lately. In addition, Kandracs pointed to rising inflation risks despite that inflation developments so far were entirely in line with the NBH expectations. Kandracs in particular pointed to inflation expectations stuck at high levels and noted the recent rise in core inflation as signs for elevated risks for the inflation outlook.

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The MPC gave no particular guidance regarding the expected length of the pause to the rate-cut cycle. It signalled that policy decisions will remain guided by a cautious and patient approach and by incoming data. Kandracs also confirmed that the policy rate will be determined on a month-by-month basis, but we think he also clearly indicated that there will be no rate cuts in the immediate future. The MPC is not afraid of keeping the policy rate constant for an extended period of time, if necessary, he said during the background discussion. He also suggested that rate hikes were not likely either, emphasising several times that the MPC considered its current reaction of pausing the monetary easing cycle as sufficient response to the heightened financial market and price stability risks. In this context, we expect that the NBH will keep the policy rate unchanged at least by the end of the year. The MPC meeting in October also suggested some dissatisfaction with short-term yields and market volatility, in our view, as it announced the re-introduction of longer-term liquidity sterilisation tools in December for the purpose of enhancing the monetary transmission mechanism.

The MPC decision to keep the policy rate unchanged in October was unanimous and there were no other proposals on the agenda, Kandracs revealed. We think this shows strong cohesion in the MPC despite the reshuffle with two new external members joining the MPC earlier this year. The situation could change as of Apr 2025 though with the pending appointment of a new NBH governor as the second mandate of Gyorgy Matolcsy will expire and he will not be eligible for another term.

Post-meeting MPC statement from October rate-setting meeting

Presentation of Csaba Kandracs on press conference after October MPC meeting

Minutes from September rate-setting meeting

Latest Inflation Report - Q3/2024

MPC meeting calendar 2024

• Next Policy Meeting: Dec 4-6, 2024
• Current Policy Rate: 6.5%
• Last Decision: Hold (Oct 9)
• Our Forecast: Cut
• Rationale: Given manageable inflation and signs of moderating growth, the RBI will cut rate to support economic activity

In its October 9 Monetary Policy Committee (MPC) meeting, the Reserve Bank of India (RBI) opted to keep the repo rate steady at 6.5%. The latest MPC meeting featured a new set of external members, reflecting a fresh perspective on policy deliberations. The decision to maintain the policy repo rate at 6.50%, with the standing deposit facility (SDF) at 6.25% and the marginal standing facility (MSF) and Bank Rate at 6.75%, was made with a 5-1 majority. This indicates a cautious yet optimistic approach, aimed at sustaining economic growth while ensuring inflation remains aligned with the target. This decision reinforces the central bank's priority to guide inflation toward its medium-term goal of 4%. The data on inflation so far has validated the cautious approach taken by the RBI, as price pressures remain volatile. The MPC opted to change the stance to neutral underscoring the MPC's focus on moving towards rate cuts in the future.

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However, Governor Das noted in his statement that risks to inflation persist and the inflation trajectory over the next three months will determine the RBI's decision in December. He viewed the heightened geopolitical tensions in the Middle East and global crude oil price volatility as key factors that could weigh on inflation. In our view, the RBI will focus on preserving the disinflationary gains made over the past two years. The goal remains to stabilize headline inflation at 4% on a sustainable basis. Given expectations of benign inflation, the central bank will likely cut rates in December 2024 to boost growth.

Economic Growth

India's GDP expanded by 6.8% y/y in Q1 FY25 (April-June), falling slightly short of market expectations of 7%. The growth slowdown stemmed mainly from reduced government spending in the lead-up to elections. Despite high inflation and elevated interest rates, consumer demand remained strong, signalling that domestic consumption has been relatively resilient.

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Looking ahead, the RBI forecasts GDP growth at 7.2% for FY25, a figure that stands slightly higher than projections from other institutions. ADB forecasts a 7% y/y growth for FY25. Meanwhile, analysts are more conservative, with growth estimates ranging between 6.5% and 7.2%, as private consumption slows and investment recovery lags under high borrowing costs. Nonetheless, high-frequency indicators show that manufacturing and services sectors are growing, with Purchasing Managers' Index (PMI) data pointing to rising orders and positive sentiment.

Rural demand, a crucial part of the economy, is gradually recovering, while urban consumption stays solid. There is speculation that the government could introduce stimulus measures to revive demand, especially following recent electoral setbacks for the ruling BJP. Possible policy responses include higher cash transfers to farmers and tax cuts to boost household income. In addition, stronger global economic activity later in 2024 could further lift growth prospects. As a result, the RBI is unlikely to focus on curbing demand just yet, despite the higher interest rate environment.

Inflation

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Although India's economic growth remains solid, inflation presents a more mixed picture. After rising to 5.1% y/y in June, inflation dropped to 3.5% y/y in July, reflecting a favourable base effect. However, this trend did not continue into August, but inflation ticked up slightly to 3.7% y/y, as expected. The uptick reveals that inflation remains volatile and heavily influenced by domestic factors such as food supplies. As the favourable base effect drops out of the equation, headline inflation is likely to rise further in Q4 2024. The MPC's forecast for CPI inflation for 2024-25 is set at an average of 4.5%, with specific projections of 4.1% for Q2, 4.8% for Q3, and 4.2% for Q4. Despite this expected moderation, the committee acknowledges significant risks, including adverse weather conditions, escalating geopolitical tensions, and volatility in global commodity prices. Notably, international crude oil prices have shown signs of instability in October, raising concerns about sustained inflationary pressures.

Financial and External Sector

India's financial sector remains robust, with commercial banks and non-banking financial companies maintaining healthy capital ratios and asset quality. India's credit growth has averaged 18.8% y/y in the Jan- August period.On the external front, the country's foreign exchange reserves reached an all-time high of USD 700bn as of September 27, 2024. India's current account deficit (CAD) widened to 1.1% of GDP in the first quarter of 2024-25, primarily due to a growing trade deficit. However, robust service exports and strong remittance inflows are expected to keep the CAD within sustainable limits.

In terms of external financing, foreign portfolio investment (FPI) flows have shifted from net outflows of USD 4.2bn in April-May 2024 to net inflows of USD19.2bn from June to October (up to October 7, 2024). Foreign direct investment (FDI) flows also remain strong in 2024-25, with both gross and net FDI inflows showing improvement in April-July 2024. Overall, the country's external sector demonstrates resilience, with key indicators of external vulnerability continuing to improve. The RBI remains confident in its ability to comfortably meet external financing requirements.

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Outlook

The FY24 budget signals the government's continued focus on infrastructure spending and economic stimulus through initiatives like income tax cuts, aimed at boosting domestic consumption. However, these measures are unlikely to offset the dampening effects of high interest rates entirely. The RBI is expected to remain cautious in the coming quarter but will cut rate in December. We anticipate a 25bps cut provided inflation gains sustain and external factors don't drive up headline inflation.

Further Reading

Monetary Policy Meeting Statement, October 2024

Reserve Bank of India Consumer Confidence Survey, June 2024

Reserve Bank of India Household Expectations Survey, June 2024

Minutes of the Monetary Policy Committee Meeting, June 2024

• Next policy meeting: Nov 19-20
• Current policy rate: 6.00%
• Our forecast: Cut (25bps)
• Last decision: Hold (Oct 15-16)
• Rationale: Rupiah's stability is the main determinant of monetary policy now that inflation is within the target band

We expect Bank Indonesia to cut the key 7-day reverse repo rate by 25bps in November, after holding it flat in October. This would be the second rate cut in the monetary easing cycle after the first one on Sep 18. However, this will largely depend on the outcome of the upcoming Fed FOMC meeting and the size of the expected Fed funds rate cut. We expect Bank Indonesia to cut the key rate at least once more in Q4.

The rupiah's stability is the main factor behind MPC decisions at present, with inflation being a secondary concern as it remains within the new target band of 2.5+/-1% (or 0.5pp lower than in 2023). On the positive side, the rupiah gained some ground against the USD in August and early September, but it has since resumed its downward trend due to the rising tension in the Middle East. Furher escalation could lead to pressure on EM currencies and hence force BI to delay the rate cut to December, in our view.

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GDP growth

GDP growth slowed to 5.05% y/y in Q2 from 5.11% y/y in Q1 2024, mainly on the back of government spending, which has slowed following the pre-election spending spree in Q1. The central bank projects GDP growth at 4.7-5.5% in 2024, up from 4.5-5.3% in 2023. The stronger growth will be driven mainly by domestic demand, with both private consumption and investment set to gain some pace. Overall, domestic demand is by far the main economic growth driver, with consumption in particular contributing to the solid GDP expansion. Looking forward, BI expects GDP growth to accelerate in 2025, though it has not provided a numerical forecast at this point.

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

Exchange rate stability

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

The rupiah's stability has been the main factor behind recent key rate decisions, with its depreciation leading to rate hikes earlier this year, while the latest gains led to a rate cut perhaps sooner than expected.

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

Inflation environment

CPI inflation slowed to 1.84% y/y in September from 2.12% y/y in August. This was the slowest inflation rate since Feb 2022. The central bank's target range is 2.5+/-1%. On the other hand, core inflation accelerated slightly to 2.09% y/y in September from 2.02% y/y in August.

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

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

Conclusion

Looking forward, we expect that the central bank will cut the key rate by 25bps in November if the rupiah manages to stabilise. However, should the pressure on the currency continue, we may see the central bank holding the key rate and postponing the rate cut to December.

We expect to see at least one more rate cut by BI in Q4, as CPI inflation remains firmly within the target band, leaving the rupiah as the sole determinant of MPC decisions.

The upcoming political developments, both in the US and Indonesia as the presidents change in Oct-Nov may also affect monetary policy, particularly through the impact on the rupiah's exchange rate, in our view.

Further reading

Last MPC press release

Calendar of MPC meetings for 2024

• Next MPC meeting: November 11
• Current policy rate: 10.50%
• EmergingMarketWatch forecast: 25 bps cut

We continue to expect the CB will be cutting the Monetary Policy Rate (MPR) by 25bps on November 11, considering the dovish position assumed by at least three board members in the last sittings, slowing core CPI inflation and a weak mid-term growth outlook.

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The main risk that could push the CB to hold its policy rate is political, in our view, considering financial volatility could arise from the US election, whether because of a Trump victory or because of uncertainty about the result, and considering the investment climate may worsen locally in the context of a potential contempt by Congress to a ruling by the Supreme Court against the judicial reform.

On the other end, currency appreciation following the US election and a better-than-expected performance by CPI inflation in October could push the CB to agree to a 50bps cut, although such outcome would almost certainly come from a divided board, in our view, considering the hawkish position assumed by Deputy Governor Jonathan Heath.

Looking at 2025, the CB is set to cut its policy rate continuously and unanimously, per comments by the only deputy governor voting to hold the policy rate at 10.75 in the September sitting, Jonathan Heath. We currently expect such easing to be gradual. However, rapid easing by the Federal Reserve could push the CB to ease faster than anticipated.

It'll be interesting to see how general CPI inflation performs, if core inflation continues to slow and if there is a clearer downward path by service prices in the upcoming CPI inflation print, to be published on November 7. The latter would be the most relevant development, in our view, as most criticism of the CB's easing has been based on the stickiness of service prices.

Service inflation slowed to 5.10% y/y in September, remaining high, pressuring core inflation up in the context of a solid deceleration of goods prices, which increased only 2.92% y/y in September. The September hike was in part due to a seasonal increase in education prices, which shouldn't appear in October and beyond. However, education inflation did not slow in October H1, suggesting the component will continue to hinder a significant deceleration of service prices in the short term.

Overall, we fully expect the CB to cut its policy rate in November. We do not see conditions for a 50bps cut, even though it's certainly possible, depending on any financial turbulence, ongoing disinflation and on how the Federal Reserve acts. The board is set to continue easing in the coming sittings; in this context, we see the MPR closing 2024 at 10.00 or 9.75%, followed by constant easing in early 2025, possibly bringing the policy rate as low as 7.75% by 2025-end.

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

The CBN will hold the final 2024 meeting of the MPC on November 25 and 26. At the September meeting, the MPC raised the monetary policy rate by 50bps to 27.25%, marking the fifth consecutive hike this year. This decision was unexpected, as market analysts had anticipated that the bank would maintain the current rate​. In his personal statement when CBN governor Yemi Cardoso voted for a 50bps hike, he acknowledged the general market sentiment was for the MPC to either maintain or lower the policy rate due to the decline in headline inflation in July and August. However, he said this viewpoint was premature. He argued that while past rate hikes have effectively influenced inflation trends, the current risk environment suggests that these gains could be lost without a continued tight monetary stance to manage inflationary pressures​. In September, CPI inflation rose for the first time in three months, edging up slightly to 32.7% y/y from 32.15% y/y in August. In the breakdown, food inflation rose to 37.8% y/y from 37.5% y/y in the previous month. During an address on Tuesday (Oct 29), Cardoso reiterated that the CBN is fully prepared to use all available measures to address inflation. While he expects that overall inflation may ease in the coming months, he pointed out that food inflation continues to be a significant issue. He highlighted the need for sustained reform efforts to effectively manage these economic challenges. We believe it is likely that the MPC will raise the policy rate at the November meeting due to continued price pressures stemming from insufficient domestic food production, fuel shortages and ongoing challenges in Nigeria's FX market.

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In August, the CBN attempted to curb the naira's decline by conducting a retail dollar auction. Following this, the World Bank in October urged the CBN to stop its ad-hoc foreign exchange auctions and to instead establish a transparent and flexible framework for FX interventions. This recommendation comes from the World Bank's latest Nigeria Development Update, which presents strategies to stabilize the naira. The World Bank forecasts that the naira will continue to be one of the poorest-performing currencies in Sub-Saharan Africa in 2024. The World Bank believes that a unified market-reflective exchange rate and strategic reserve-building will encourage stability, attract investment and increase fiscal revenues. However, at the recent IMF/Worlds Bank annual meeting in Washington DC, finance minister was firm in saying Nigeria selectively implements recommendations from international institutions and has autonomy in choosing policies. The IMF this month reported that the naira is showing signs of stability, aided by recent interest rate hikes and the CBN's efforts to address FX backlogs. In their recent financial stability report, the IMF noted that the CBN has fulfilled all verified outstanding foreign exchange commitments, although USD 2.4bn remains under investigation.

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Stakeholders, including the Manufacturers Association of Nigeria (MAN) and the Lagos Chamber of Commerce and Industry (LCCI), continue to express concerns that the CBN's policies could negatively affect the manufacturing sector and hinder business expansion. However, like Cardoso, many other MPC members seem set on maintaining a tight monetary policy. The deputy governor of financial system stability Philip Ikeazor indicated that while domestic inflationary pressures are beginning to ease, they have not yet reached a level justifying a change in the current tight monetary policy. He pointed out that factors such as climate change and exchange rate depreciation still pose risks to maintaining stable prices. MPC member Murtala Sagagi echoed these sentiments, arguing for the MPC to pre-emptively tighten policies to safeguard against potential economic shocks. All present MPC members voted for a rate hike in September.

Monetary Policy Committee Statement

Monetary Policy Committee Meeting Schedule

• Next policy meeting: Nov 4, 2024
• Current policy rate: 17.50%
• Last decision: Cut, 200bps (Sep 12)
• Our forecast: Cut, 200bps
• Rationale: Favourable inflation outlook and external sector stability

We expect the State Bank of Pakistan (SBP) to go for another aggressive policy rate cut in its meeting on Nov 4. This would mark the fourth straight reduction in the key rate, prompted by the continued downtrend in inflation. The real interest rate on the spot basis has hit over 1,000bps, which reportedly is at a record high. Supported by the IMF loan program, the external sector remains buoyant - another factor that would provide comfort to the SBP to maintain its easing cycle that has seen a 450bps reduction in the policy rate since June.

Inflation environment

Inflation slowed to 6.9% y/y in September, the lowest since Jan 2021. It was partly driven by a high base effect but also reflected weak consumer demand, improved farm production, a stable exchange rate and lower global oil prices. In July, the SBP forecasted inflation to average 11.5%-13.5% in FY25. Since then, it has turned more upbeat on the outlook. Last month, the central bank said there was a possibility of inflation falling below the earlier forecast range. The optimism gained credence following the release of the latest forecast by the IMF, which revised down its average inflation projection to 9.5% for this fiscal year, from 12.7% predicted earlier.

We believe inflation has bottomed out and is likely to have edged up in October when electricity consumers would start receiving higher bills following the expiry of the three-month subsidy period. This along with likely spillover from taxation measures announced in the FY25 budget poses upside risks to inflation.

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GDP growth

Pakistan's economy is on track to recover further in FY25, supported by a pick up in manufacturing and services sectors amid the absence of import controls, falling borrowing costs and muted price pressures. The SBP expects GDP growth at 2.5%-3.5%, which is in line with the IMF's forecast of 3.2% expansion. There are concerns that the agriculture sector would weigh on growth, considering an expected shortfall in production of cotton as well as wheat due to the wheat import scandal, which may dissuade farmers from cultivating the crop this season.

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

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External sector

Anchored by back-to-back IMF bailout packages, the country's external stability conditions have been strengthening for the last few months. Despite heavy debt repayments, foreign exchange reserves have reached the highest since April 2022. The buildup has been supported by renewed access to external financing, bilateral debt rollovers as well a modest current account deficit (CAD), which has enabled the SBP to make sizeable interbank forex purchases. The central bank projected the CAD to be in the range of 0-1% of GDP in FY25, widening from 0.2% in FY24 as recovery in domestic demand jack up imports. It sees forex reserves to rise to USD 13bn by June 2025.

Moreover, the return of foreign investors to the sovereign debt market signals Pakistan's external sector stability. From March 1 till Oct 21, overseas investors bought USD 812.9mn worth of T-bills on a net basis. Strong appetite for short-term debt securities can also be attributed to high interest rates, a stable exchange rate and an improving economic outlook under the IMF loan program.

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Conclusion

Overall, the sharp moderation in inflation will prompt the SBP to cut the policy rate by 200bps on Nov 4. Stability in the external sector will provide further comfort to the SBP to slash the key rate from 17.50%. We believe that there is room to bring down the benchmark interest rate to around 13% as the SBP will keep the monetary policy tight on the recommendation of the IMF.

• Next monetary policy meeting: Dec 19
• Current policy rate: 6.0%
• EmergingMarketWatch forecast: 25bp cut
• Rationale: Monetary Board statement of Oct 16

We think that a 25bp policy rate cut is the most likely decision at the next meeting of BSP's Monetary Board (MB) on Dec 19. On Wednesday, the MB lowered the BSP's target reverse repurchase (RRP) rate by 25bps to 6.0%.

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The BSP's shift toward less restrictive monetary policy continues to be supported by the within-target inflation outlook and well-anchored inflation expectations. Nevertheless, the central bank will continue to monitor closely the emerging upside risks to inflation, including geopolitical factors. Going forward, the MB will maintain a measured approach in its easing cycle to ensure price stability consistent with sustainable economic growth and employment, the statement said.

Earlier this month, BSP Governor Eli Remolona said it was likely that the policy interest rate would be cut by 25bps in October, and by an additional 25bps in December, provided the data were in line with their expectations.

Inflation

CPI inflation slowed down to 1.9% y/y in September from 3.3% y/y in August. The inflation target range is 2.0-4.0%. The CPI rose by 3.4% y/y in Jan-Sep.

The MB's assessment is that price pressures continue to be manageable. The risk-adjusted inflation forecast for 2024 decreased to 3.1% from 3.3% in the previous meeting. However, the risk-adjusted forecasts for 2025 and 2026 rose slightly to 3.3% (from 2.9%) and 3.7% (from 3.3%), respectively. The inflation expectations are well-anchored.

The balance of risks to the outlook for 2025 and 2026 has moved toward the upside mainly because of potential adjustments in electricity rates and higher minimum wages in areas outside Metro Manila. The downside factors are still related to the effects of lower import tariffs on rice.

Economic growth

The MB expects domestic economic growth to remain strong on the back of improved prospects for household income and consumption, investments and government spending. The improved outlook is supported by the launch of the monetary easing cycle in August and the announced cut in reserve requirements in October.

Exchange rate

The peso is trading at USD/PHP 57.763 as of the time of writing, which compares with USD/PHP 57.197 on Aug 15, the date of the previous MB meeting. The exchange rate was USD/PHP 55.388 on Dec 29. The FOMC will have two more meetings this year, from Nov 6-7 and from Dec 17-18.

The relevance of the exchange rate to the next MB decision will depend on both the US monetary policy decisions and the exchange rate trajectory until Dec 19, in our view.

Further reading

Press release after October 2024 monetary policy action

Schedule of monetary policy meetings

Highlights of MB meetings on monetary policy

Inflation Report

• Next MPC meeting: Nov 5-6, 2024
• Current policy rate: 5.75%
• EmergingMarketWatch forecast: 5.75%

Rationale: The Monetary Policy Council has charted out a restrictive monetary policy of late, with real interest rates very high historically, but it doesn't seem likely to ease this policy until it sees just what happens to inflation in Q1 2025 and it won't know that until April 2025, and so we still see the first cut not for many months to come. The MPC is thus likely to look past recent economic weakness, justifying this by pointing to inflation that is likely to be near 5% y/y through year-end and in Q1 as well. Council members have said many times they will not cut rates while inflation is rising and inflation will in all probability rise through early next year.

Speculation that monetary easing could still happen this year has been triggered by the very weak September data, and especially the poor retail sales print. It has been clear for some time that foreign demand is weak and won't help boost the economy, leaving the consumer as the main growth driver. However, the surprising retail sales fall suggests weakness among the consumer as well. There are likely one-offs in play, such as the floods, the uncertain global situation, and the desire to rebuild savings ahead of many uncertainties, from the course of the war in Ukraine to the US presidential election (which could seriously worsen the security situation in Poland if Trump wins). But like MPC member Ludwik Kotecki said on Wed., the coming data will be needed to see whether the weakness continues or other factors were in play. The consumer sentiment data for October was much worse than expected in a potentially worrying sign.

So, though we don't expect rates to be cut this year or nearly next, there is perhaps a path to rate cuts. If inflation were to surprise well to the downside through year-end, such as if demand collapses, and if the government decides to continue all anti-inflation measures for power, perhaps inflation will come in below 5% and not be set to rise. That could lead to a cut. We imagine this would be more likely in January than in December since December would be too soon to know where inflation will be at year-end whereas the anti-inflation measure path in January will likely be far clearer (i.e., the government's decisions will be known, the regulator URE's decisions on power and gas will be known, the impact of the US presidential election should be somewhat clearer).

Yet, inflation doesn't seem likely to be low enough and there is still likely to be some upward increases early next year to mean that a cut in March or April is more likely. Though we do see April as more likely, if inflation is lower than expected early in 2025, then a March cut would rise in likelihood. And the latest economic weakness would also suggest that the first cut could be bigger than expected, especially if economic activity in 2025 looks likely to come in below the 3.9% expected by the government.

Archived video of all MPC press conferences

MPC's post-sitting statements

Latest council minutes

Latest NBP inflation report (July 2024)

Most recent MPC voting results

• Next MPC meeting: Nov 21, 2024
• Current policy rate: 50.0%
• EmergingMarketWatch forecast: Hold
• Rationale: Persistent inflation keeps CBT cautious, focusing on sterilisation tools over changing rates

The CBT is likely to focus on the effective use of sterilisation tools in the near term, rather than further rate hikes, in our view. The MPC reaffirmed its cautious and tightening stance in its recent policy statement, signalling a continued focus on combating inflationary pressures. The MPC decided to keep the policy rate unchanged for the seventh month in a row, taking into consideration heightened uncertainty regarding the pace of improvement in inflation, it said. Despite holding rates steady, the Committee reiterated its cautious stance against upward risks to inflation, saying a tight monetary policy stance will be maintained until a significant and permanent decline is achieved in the underlying trend of monthly inflation and inflation expectations converge toward the projected forecast range. Furthermore, the CBT underscored that additional tightening measures would be implemented to ensure price stability, should a pronounced and sustained deterioration in the inflation outlook be anticipated. Recognising the delayed effects of monetary tightening, the committee planned to implement policy decisions to establish the necessary monetary and financial conditions for ensuring a downward trend in inflation. Q3 indicators suggested that domestic demand continued to slow, approaching levels supportive of a decline in inflation, according to the committee. While core goods inflation remained low, the report indicated that service inflation is expected to improve in the Q4, it said.

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Recent economic indicators show that Turkey's retail sales have been increasing while industrial production has been decreasing. This widening gap between demand and supply could exert additional inflationary pressure, as higher consumer demand meets reduced domestic production, in our view. While consumer goods imports are still on the rise, helping to bridge the supply shortfall, increased reliance on imports may affect the trade balance and put pressure on the currency, potentially complicating the inflation outlook, we think. Therefore, these factors may reinforce the CBT's cautious stance on monetary policy, in our opinion. Additionally, we think the stubborn behaviour of service and rent inflation remains a concern. Both sectors, in our assessment, have exhibited persistent price increases, resisting downward adjustments despite broader economic trends. Persistent high inflation in services and rents can contribute significantly to the overall inflation rate, making it more challenging for the CBT to achieve its disinflation goals, in our opinion.

Historically, October inflation figures are seasonally high due to carryover from September, in our view. Therefore, we believe the CBT is unlikely to declare a downward trend in inflation based on one month's data, nor will it consider an upward trend based on September alone. In this context, inflation needs to align with or fall below expectations for two consecutive months to signal an interest rate cut, in our assessment. In December, the CBT will review the October and November inflation data and may signal accordingly.

Even though Turkey's CPI fell below its policy rate in September for the first time since Nov 2021, CBT Governor Fatih Karahan said that there is still some distance to be covered related to the disinflation process. Therefore, the CBT will continue to maintain tightness in monetary policy, according to his statements after the September inflation data. Similarly, Deputy Governor Cevdet Akcay sounded quite hawkish in a recent interview with The Economist.

Overall, these factors, coupled with the recent MPC acknowledgment of increased uncertainty regarding the pace of inflation improvement in recent data, suggest, in our assessment, that the CBT may have closed the door on a rate cut in the near term.

The summary of the MPC's Oct 17 meeting is due to be published on Oct 24.

MPC rate decision in October

Quarterly Inflation Report for Q3

Monetary policy strategy for 2024

• Next meeting: Oct 17
• Current policy rate: 5.50%
• EMW forecast: 5.25%

The BCCh's Monetary Policy Council will hold its next policy meeting on Oct 17 and the expectation is that it will cut its benchmark interest rate by 25bps, continuing to move toward monetary policy neutrality. The current dilemma on monetary policy decisions is that annual CPI inflation is above the 3.0% target and set to rise a bit more in the next few months, while the economy works with a slightly negative output gap and gives signs that it needs monetary policy to keep advancing toward neutral or expansive. The MPC's main guidance is that cuts will continue, helped by an environment of weak-ish domestic demand that reduces inflation risks and the space afforded by recent global financial developments.

Economic Activity

The BCCh recently lowered the ceiling of its GDP growth forecast range for 2024 after a disappointing q/q GDP contraction in Q2. Forecasts for domestic consumption and investment were trimmed for the entire 2024-2026 period. The latest output gap estimate is an economy working with a slightly negative gap through the end of 2025, even though this is a projection that assumes MPR cuts continue. The central bank still expects consumption to recover given that real wages have been growing for several months, and investment to rebound behind a couple of big mining projects.

Lending activity has been weak for the entire post-pandemic period and the situation only worsened in recent months, with consumer and corporate lending well below pre-pandemic levels. The MPC argues that borrowing costs are declining in line with the normal lags seen during prior rate cutting processes. Still, the council acknowledged that tight conditions for bank lending seems to be affecting investment in the non-mining sectors of the economy, which are more reliant on bank loans than the big multinational miners.

The performance of the labor market also suggests the economy needs laxer monetary policy. Unemployment remains high, and the most recent data shows an increase in the number of unemployed and a decline in the number of jobs over the past 3-4 months. Real wages have been growing, but this seems based on backward-looking nominal adjustments and revisions to the minimum wage.

Inflation

Annual CPI inflation rose for the past six months and the latest reading of 4.7% y/y is far from the central bank's 3.0% target. However, the increase has been largely led by an overdue adjustment of electricity tariffs following a 5-year price freeze, and a few volatile prices. The main core inflation reading, which excludes the most volatile third of the CPI basket, was at 3.7% y/y in August.

There are more electricity price hikes coming over the next nine months, including a big revision in October, so headline CPI inflation may keep rising above 5.0%. However, the central bank believes the environment of weak demand will contain second round effects from the power price hikes. In this context, the MPC is likely to focus more on core inflation than headline inflation for rate decisions. The current MPR of 5.5% contrasted with the 3.7% core inflation rate suggests there is room for cuts before reaching the inflation-adjusted neutral rate of 1.0%.

MPR corridor

The BCCh's latest update of the monetary policy rate corridor, the main non-verbal tool for guidance, suggests 50bps worth of rate cuts in the last two policy sittings of the year is the baseline scenario. The corridor allows for this to materialize through a 50bps rate cut in October and a hold in December, but two 25bps cuts are widely considered the most likely outcome.

US Fed decision

The corridor update was published Sep 3 and assumed the United States' Federal Reserve would be cutting rates by 25bps per sitting. The first cut was of 50bps, but BCCh Governor Rosanna Costa implied that this did not materially change the environment projected with the monetary policy corridor.

We believe the Fed's rate cut basically eliminates an extra restriction the BCCh had on rate cuts, since interest rate differentials, both effective and expected, were tighter than usual before Jerome Powell's Jackson Hole speech. Over the past month the CLP appreciated away from historically weak levels. This allows the MPC to focus more exclusively on domestic economic activity-inflation dynamics for its rate decisions.

PBoC stimulus

The stimulus announced by the People's Bank of China led to further CLP appreciation and higher copper prices. With China being the main export destination of Chilean exports and the main source of export growth in recent years, developments on the outlook of Chinese demand are definitely relevant for Chile. It remains to be seen if the price changes triggered by the stimulus announcement last, but a priori this is a development that relaxes the monetary policy dilemma the MPC faces. Prospects for stronger export growth can help consumption and investment without requiring extra monetary policy stimulus or adding inflation pressure, and a stronger CLP can help mitigate the impact of the power price revisions.

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• Next MPC meeting: Oct 31
• Current policy rate: 10.25%
• EmergingMarketWatch forecast: 50bps cut

A deteriorating fiscal outlook has emerged as a key argument for some board members against accelerating interest rate cuts. BanRep co-director Roberto Steiner recently highlighted this point, suggesting that the majority might prefer to continue reducing the monetary policy rate by 50bps in the second-to-last sitting of the year. One month ago, in the previous sitting, the majority stressed the lack of clarity on the fiscal deficit size and financing methods, which hampers the country's ability to fully benefit from easing external financial conditions and contributes to increased inflationary risks stemming from exchange rate fluctuations.

However, uncertainty remains as the inflation landscape and the Fed's monetary policy decisions opened the door for a more significant reduction than the current 50bps. In September, CPI inflation reached its lowest annual rate since 2021. Additionally, it's important to highlight that while the majority voted for a 50bps cut in recent meetings, that majority diminished from five to four co-directors.

Overall, we see a highly uncertain outlook, with both 50 and 75bps cuts as viable possibilities. The board has shown a clear tendency to adopt a hawkish stance, prioritizing the containment of inflationary risks over stimulating economic activity, which is the approach favored by the government. The existing risks tied to the government failing to adhere to the fiscal rule could also sway the decision to uphold the 50bps cut. Ultimately, the decision is likely to be a divided vote, with the finance minister insisting on reducing the interest rate more aggressively.

• Current policy rate: 4.50%
• Next monetary policy meeting: Nov 25, 2024
• Expected decision: Hold

The MPC expectedly maintained the policy rate steady at 4.50% on Oct 9 and again cited the elevated inflation environment and the increased geopolitical uncertainties as factors backing its decision. None of those changed since the previous rate decision and the geopolitical situation even deteriorated further. Thus, the BoI did not change the rhetoric and continued to stress on the need to first look at the stability of the financial markets and to make efforts to reduce risks along with pulling inflation down to the 1-3% target range and supporting economic activity. Yaron stated that the monetary policy was still restrictive enough to bring inflation back to the target. However, while before he was speaking of potential policy rate cut in Q2 2025, the governor now suggested that the MPC might raise the policy rate in case of signs of further increase in inflation. Later on, deputy governor Andrew Abir explained that any potential rate hike would depend on inflation releases for Sep and Oct and what kind of budget the government adopts on Oct 31. Abir explained that the fiscal policy was currently very expansionary and inflationary because of the war. The BoI research department no longer expects rate cuts in the following year as it assumes the policy rate to remain at 4.50% by October 2025 as it would take longer for the increased inflation to return to the target. We recall that this is not a guidance or a projection of the MPC but has most likely been endorsed by the policy makers.

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Inflation has been accelerating since March until August but then moderated to lower-than-expected 3.5% y/y in September, in a positive surprise to the markets and thus reducing significantly the chance for a rate hike in the next rate-setting meeting on Nov 25, in our opinion. However, even if the latest print pointed to some stabilisation in the inflation environment, the inflation has been above the 1-3% target range in the past three months and we think that the easing in September could be only one-off, supported by volatile oil prices and weaker consumption in fashion stores ahead of the Jewish New Year, as reported by local media. After the last rate decision, Abir stated that the inflation environment has become more challenging since end-August and the inflation spike was due to supply disruptions in tourism, construction and agriculture, which are not expected to start performing better in the near future, we think. The latest central bank forecasts sees inflation accelerating further in early 2025 with possible moderation towards the target in H2 2025. Inflation is not likely to return to the target before Q4 2025, however, as the inflation forecast is seen at 3.2% y/y in October 2025, according to the BoI. The BoI said that the inflation forecast tends to the upside and is affected by supply limitations, which are also affecting economic activity. It repeated that the war and its impact on activity, the shekel depreciation, prolonged supply limitations, fiscal developments, and higher global oil prices are pro-inflationary risks.

Supply limitations are also affecting adversely economic activity and even if GDP has likely continued increasing in Q3, the expansion is expected to be only modest and GDP would be still deviating from the pre-war trends. The distance to the trend is largely due to those supply limitations, which have been affecting several industries, of which construction was hardest hit. The BoI revised down GDP growth projections by 1pp and 0.4pps to 0.5% in 2024 and 3.8% in 2025 and said that GDP would remain below the pre-war trend in the medium term. Nevertheless, we doubt that the MPC would hesitate to increase the policy rate should the next inflation release (Nov 15) turns out worse than expected and the government does not manage to pass all the austerity measures.

Board statements, press briefings, minutes from MPC meetings

Calendar of MPC meetings

Latest BoI macroeconomic forecasts

Monetary policy reports

Bank of Israel Law

The Monetary Committee

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

The NBK kept the base rate on hold (14.25%) at the Oct 11 meeting. This decision is in line with expectations due to signals that the bank is concerned about inflationary factors at present. Its statement confirmed this caution as the NBK highlighted higher PPI, import prices, utility tariff hikes, and household inflation expectations. In addition, it remains wary of inflationary pressures associated with fiscal stimuli, demand trends, and credit growth. With regard to external factors, the NBK noted global food prices and inflation dynamics in Russia as concerns reflected in its decision.

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Overall, CPI inflation eased marginally in September, both in m/m and y/y terms. At the same time, there has not been consistent deceleration of core inflation and we also remind that the government is yet to present this year's final budget revision. The associated sovereign fund transfer hike will have to be factored into NBK's inflation management strategy, hence the bank's current caution. In addition, the tenge's recent depreciation also amplified inflationary risks, so a renewal of the monetary easing cycle would have been premature in October.

Looking forward, we believe the central bank will still have to account for political demands for monetary easing in the context of economic growth goals. It will arguably look to deliver rate cuts as early as possible, which is indirectly confirmed by its Oct comment on the base rate decision. Unlike the one from September, it does not clearly signal that the rate will remain on hold for the rest of 2024. At this stage, the November meeting still seems like it will come too soon for a rate cut, but favourable inflation dynamics may end up changing the NBK's decision, in our view.

• Next policy meeting: Nov 28
• Current policy stance: 3.25%
• Our forecast: Hold
• Last decision: Cut by 25bps (Oct 11)
• Rationale: Strong mortgage credit growth exacerbates concerns about financial stability

The Bank of Korea (BOK) is likely to pause its monetary policy easing until start-2025 due to the ongoing uptrend in mortgage lending after delivering a 25bps rate cut in October. In our view, there is still significant uncertainty whether the macro-prudential measures implemented by regulators will be sufficient to rein in household lending growth especially in a falling interest rate environment. The BOK has clearly communicated that its primary concern remains the potential accumulation of financial imbalances due to strong credit growth. Meanwhile, inflation has already fallen below the 2% target of the BOK, but the central bank is no rush to cut rates in order to stimulate demand as it sees significant danger to long-term growth from excessive household debt accumulation.

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The case for no rate cuts until the end of the year is also supported by the fact that the BOK reported that only one board member sees conditions for a rate cut in the next 3 months. The BOK also added that it sees inflation staying below 2% for some time after falling to 1.6% y/y in September. However, the central bank clearly does not see the need to fight deflationary pressures. In fact, the recent dip in inflation was mostly related to base effects concerning food prices.

We still think that there is 20-25% chance that the BOK delivers another 25bps rate cut in November provided that headline CPI inflation decelerates further in October, while credit growth and real estate prices continue to moderate after the positive signs seen in September. To note, the government implemented several macro-prudential measures in early September to limit credit growth such as the second phase of the stressed debt service ratio (DSR). In addition, there are reports that the government wants to further tighten lending rules to in order to restrict mortgage lending.

In regards to economic growth, there are signs that economic momentum is slowing down as Manufacturing PMI fell to a 15-month low of 48.3 in September. That said, industrial production still rose by 3.8% y/y in August led by robust external demand for chips, albeit the former might be slowing down as the rapid investment growth in AI data centres has moderated. At the same time, the construction sector continues to weigh heavily on growth as it fell by 9.0% y/y in August. Domestic consumption remains depressed as retail sales fell by 1.3% y/y, even though the unemployment rate remains near record low levels at 2.5% sa in September and consumption should eventually recover due to the recent improvement in real wage growth thanks to falling inflation. Overall, we still see no urgency for the central bank to cut rates in order to rescue the economy.

MPC meetings calendar 2024

Minutes

Previous MPC decisions

MPC board members

• Next policy meeting: Nov. 6, 2024
• Current policy rate: 3.00%
• Our forecast: Hold
• Last decision: Hold (Sep. 5)
• Rationale: Status quo is likely to be maintained due to favourable inflation outlook. Besides, current monetary policy stance is seen as supportive of growth. Strengthening ringgit to provide additional comfort

We expect Bank Negara Malaysia (BNM) to keep the overnight policy rate at 3.0% for the tenth straight meeting on November 5 to support economic growth amid favourable inflation outlook. During Jan-Aug 2024, inflation averaged 1.8% y/y, with August print clocking in at four-month low of 1.9% y/y. Last week, the government revised its full-year inflation forecast to 1.5%-2.5% from 2.0%-3.5% predicted initially, mainly as the second-round effect of diesel subsidy rationalization, which was implemented on June 10, did not materialize, in large part due to the government's measures to shield low-income households and eligible businesses from the price hike. This is evident by muted core inflation, which averaged 1.8% y/y in the first nine months of 2024.

The BNM is likely to follow suit and downgrade its inflation forecast from 2.0%-3.5% in its next meeting. In fact, it has already expressed optimism, noting in its previous monetary policy statement that average inflation is unlikely to exceed 3% this year. Besides, the government last week announced that it will not withdraw blanket subsidy for the widely consumed RON95 gasoline until mid-2025, thereby minimizing upside risks to inflation in the near-term. Moreover, the BNM will draw comfort from the strengthening of ringgit, which has appreciated by 9.3% against the USD since mid-February when it hit a 26-year low, driven largely by foreign funds inflow amid narrowing yield differential with the US.

Meanwhile, the central bank views the current monetary policy stance as supportive of the economy, which expanded by 5.1% y/y in the first three quarters of 2024 on the back of stronger private consumption and investment as well as a pick up in exports. It sees economic growth this year to be closer to the upper-bound of the 4% to 5% forecast range, up from 3.6% in 2023. This is in line with the government's upwardly revised forecast of 4.8%-5.3% for 2024. The economy is expected to remain robust at 4.5%-5.5% next year, with growth in the services sector and export-oriented manufacturing sector gaining further momentum.

Last month, BNM deputy governor Adnan Zaylani Mohamad Zahid said in an interview with Bloomberg that there is no real compelling reason or any pressure to adjust the OPR in either direction at this stage, adding that the country's resilient economy and low inflation should allow the central bank to keep interest rates unchanged for the rest of the year. The remarks are consistent with market consensus, which predicts the BNM to leave its benchmark interest rate steady at least until 2026.

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• Next MPC meeting: Nov 8, 2024
• Current policy rate: 6.50%
• EmergingMarketWatch forecast: Hold

Rationale: We think that the NBR will not deliver another policy rate cut this year. The last MPC meeting is on Nov 11, and we believe the rate will remain at 6.50%, keeping real rates in the positive territory for longer. We ground our assumption on a persistent double-digit service inflation, a considerably wide fiscal gap, and high risks of inflationary pressure in the food sector due to bad weather. We also consider robust wage rises and the potential upward trend of oil prices due to conflict intensification in the Middle East. Further on, we see the NBR preserving the same stance in the following meetings in January and February 2025, as we have no reasons to think that escalating uncertainties regarding inflation developments, particularly in food, service, and energy would clarify. We note that the government measures to contain inflation, like price caps in the energy market and markup caps on several basic foods, expire in April and at the beginning of next year, respectively. There are no signals that they might be extended further. Besides, a board member recently said that the central bank was pausing key rate cuts in the context of challenging fiscal consolidation.

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The September inflation release showed that strong inflationary pressure in services persists, sustained by wage increases and the government decision to eliminate some tax breaks in accommodation and food that led to higher prices. In addition, an unexpected inflation speeding in food proved that inflationary pressure might occur from that side as well. These developments come on top of a risky setting, with a quite relaxed fiscal policy, high government deficit, large spending in election year and consumer lending acceleration despite high rates. Therefore, we believe a more prudent approach would be suitable, favouring a policy rate hold decision for now. In fact, the NBR hinted in its last release announcing the key rate decision on Oct 4 that it might revise upwards the year-end inflation projection in the next Inflation Report.

On the external front, markets turmoil and increased geopolitical tension in the Middle East and Ukraine mirror low predictability in financial markets and high risks of other disruptions in commodity markets. Moreover, the NBR often stressed that it also considered policy decisions of the central banks in the region and Poland seems to rule out rate cuts this year.

It's true that the GDP performed unexpectedly weaker in Q2, which could make another policy rate cut necessary to stimulate growth. However, most projections point to a recovery in H2, backed by consumption and investment. Besides, private consumption posted an unexpected recovery in Q1 and Q2, sustained by higher wages and the government relaxed income policy. Therefore, our opinion is that the major concern should not be the high-rates effects on growth, but the numerous inflationary pressures, markets turmoil and high global uncertainties.

To remind, the NBR decided on a second consecutive rate cut at its MPC meeting on Aug 7. The following meeting on Oct 4 announced a hold decision and mentioned an upward revision of the inflation moderation path in the short run. CPI growth continued to moderate in August, but the print was still above expectations, while the September print was broadly in line with economist projections. In addition, the moderation was mainly backed by temporary measures that the government implemented and base effects.

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

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

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

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

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

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

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

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

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

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

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

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

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

• Next Policy Meeting: Nov 27
• Current Policy Rate: Standing Deposit Facility Rate (SDFR) at 8.5%, Standing Lending Facility Rate (SLFR) at 9.5%
• Previous Decision: Hold (Sep 26)
• Our Forecast: Cut, 25bps
• Rationale: With inflation now in the negative, CBSL is expected to cut rates further to stimulate investment

At the last MPC meeting on Sep 26, the Monetary Policy Board decided to keep the SDFR and SLFR unchanged at 8.25% and 9.25%, respectively, after carefully evaluating the macroeconomic environment and potential risks. The Board aims to ensure inflation stabilises around the 5% target in the medium term while fostering the nation's economic growth potential. The CBSL indicated that inflation has been easing significantly, with headline inflation expected to remain below the 5% target in the near future.

Recent reductions in fuel, electricity, and gas prices, along with a moderation in food costs, have supported this trend. Core inflation, which reflects underlying demand pressures, has also decelerated, albeit at a slower pace. While inflation may decline further in the short term, it is projected to stabilise around the 5% level in the medium term. This rate hold follows an earlier rate cut of 25bps in July. The primary aim of the reduction was to align medium-term inflation with the 5% target while supporting the economy in reaching its full potential. However, it appears that CBSL is now seeking to promote lending in the private sector and enhance overall economic activity. Recent inflation trends saw price growth turn negative. CCPI declined to -0.5% y/y in September.

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Economic Growth

Sri Lanka's real GDP grew by 4.7% y/y in Q2, slightly down from 5.0% y/y growth in Q1, marking the fourth consecutive quarter of growth after five quarters of contraction. Strong industrial sector growth drove this headline figure, with industrial output rising 10.9% y/y, supported by utilities, basic metals, wood, and chemicals. Agriculture surged 1.7% y/y, driven by seasonal factors, while the construction sector expanded by 11.9% y/y. The services sector saw a slight slowdown to 2.5% y/y growth, with notable expansion in insurance and accommodation reflecting improved tourism. Economic activity is gaining momentum, bolstered by ongoing reforms and support from the IMF.

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It is worth noting though that recent PMI trends have been choppy. The Purchasing Managers' Index (PMI) for manufacturing dropped to 55.5 in August (from 59.5 in July). Similar trends were seen in PMI Services and PMI construction, which lends to our expectation of a rate cut in November to support economic growth.

Inflation Dynamics

Following the successful management of inflation by late 2023, the Central Bank of Sri Lanka shifted its focus from price stability to promoting economic growth. This strategic change has allowed the CBSL to handle inflationary pressures more effectively. However, inflation has been volatile in Sri Lanka. During Q1 2024, inflation continued its downward trajectory, providing the central bank with the flexibility to implement a rate cut in March. However, this positive trend reversed in April, with the Colombo Consumer Price Index (CCPI) reflecting a year-on-year increase. By July, the CCPI rose to 2.4% y/y, before dropping to 0.5% y/y in August and moving into deflation of 0.5% in September. A huge factor contributing to the decline is also the cut in electricity tariffs and fuel prices. With fuel prices further cut in September, inflation will remain low. As a consequence, the CBSL will look to cut rates in the upcoming meeting, in our view.

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External Sector

On the external front, the merchandise trade deficit widened during the first eight months of 2024 due to rising imports. Nevertheless, improvements in tourism revenues and remittances have strengthened the current account. Additionally, the Sri Lankan rupee has appreciated by over 7% against the US dollar this year, with gross official reserves increasing to USD 6 billion by the end of August. Continuous support from the IMF, along with progress in debt restructuring, is expected to further enhance the external sector.

The export sector is anticipated to strengthen in the second half of 2024, aligning with a global trade recovery. However, heightened risks to the global outlook due to geopolitical tensions, the upcoming US elections, and Federal Reserve rate cuts could delay this recovery. Nevertheless, optimism surrounding the tourism sector persists as tourist arrivals surpassed 1.2 million in Jan-Jul, marking a 31% y/y increase in July alone. Furthermore, worker remittances - a vital source of foreign exchange for Sri Lanka - rose by 4.7% y/y in July. Foreign exchange reserves continue to increase, steadily approaching the USD 6bn mark.

In a recent development, Sri Lanka reached an agreement with its bondholders regarding its debt restructuring efforts, which is crucial for stabilising the country's finances and restoring investor confidence. This agreement is seen as a vital step forward, especially in light of the upcoming parliamentary elections, where economic recovery and stability will be key issues for voters.

Outlook

Currently, the Central Bank of Sri Lanka appears inclined to prioritize economic growth over controlling inflation. With inflation remaining subdued, there is significant room for additional rate cuts. However, the CBSL emphasises the necessity of ensuring that market lending rates accurately reflect the central bank's earlier reductions. It views current market rates as elevated and acknowledges that the transmission of past rate cuts into the broader economy is incomplete. Despite this, the CBSL is expected to cut rates in November to provide a fillip to the domestic economy.

Further reading

Last MPC decision

Calendar of MPC meetings

Last MPC report on economic developments

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

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

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

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

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

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

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

GDP

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

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

Inflation

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

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

Lending

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

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

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

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

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

Exchange rate

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

Further reading

MPC decision of Oct 16

Schedule of MPC meetings

Edited minutes of MPC meetings

Monetary policy report

• Current rate: 13%
• Next rate decision: Oct 31
• Inflation seen accelerating

The central bank (NBU) is likely to announce another on-hold decision on Oct 31, leaving the key policy rat at 13%. The NBU's easing cycle is over this year, as inflation has been accelerating thus far in H2 2024, as widely expected. Headline CPI inflation accelerated further 8.6% y/y in September from 7.5% in August, according to the Statistics Service. This was higher than the central bank's 5% target for the third month in a row. What is more, the NBU said in its second straight monthly inflation commentary two weeks ago that both headline and core inflation grew faster than anticipated. At the same time, inflation rates remain significantly below the key policy rate.

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Meanwhile, the IMF has apparently kept pushing the authorities to accept further depreciation of the hryvnya because of the wide fiscal gap, which will support high inflation. And IMF head Kristalina Georgieva said in a statement on the fifth review of the EFF programme last week that high inflation limited room for further easing in the near term. The IMF predicted in its latest World Economic Outlook that average annual inflation would grow to 9.0% next year from the 5.8% expected this year.

At the Sep 18 key policy rate discussion, 10 out of 11 MPC members supported maintaining the key policy rate at 13%. What is more, one MPC member spoke in favour of hiking the rate to 13.5%. The subsequent on-hold decision was announced on Sep 19. The MPC members agreed that inflationary pressures were high, including the need to finance a significant budget deficit, while high inflation, they stated, was driven by rising costs of raw materials, power and labour, a lower harvest, and the effects of the hryvnya depreciation earlier this year. So the MPC saw no reason to resume key policy rate cuts this year, and 10 out of 11 its members expected the rate to stay at 13% this year, while one predicted that it would be increased to 14%.