• 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.

• Copom meeting: Aug 4-5, 2026
• Current policy rate: 14.25%
• EmergingMarketWatch forecast: 25-bp cut (to 14.00%)

A sharper-than-expected slowdown in IPCA-15 inflation in July is likely to support another 25-bp Selic cut by the Copom at its coming Aug 4-5 policy meeting, taking the policy rate to 14.00% in what is expected to be the fourth consecutive cut this year and which brings total easing to 100bps. IPCA-15 inflation rose just 0.06% m/m in July, which came in below the 0.19% consensus expectation as food and beverage deflation helped offset higher housing and healthcare prices. In 12-month terms, IPCA-15 inflation slowed to 4.52% y/y from 4.80% the month before, remaining slightly above -- but closer to -- the 4.50% upper limit of the +/- 1.50-pp fluctuation band around the 3.00% target. In our view, following the below-consensus June IPCA print, the July IPCA-15 data provide further evidence of easing inflationary pressures (even if temporary), strengthening the case for another rate cut, although it could be the last before the Copom pauses to reassess the inflation outlook.

Although the recent inflation data suggest there is room for an additional Selic cut, the inflation outlook remains challenging, with the balance of risks still tilted to the upside. BCB Governor Gabriel Galípolo has noted that persistently de-anchored long-term inflation expectations are among the Copom's main concerns. This is also one of the four upside risks identified by the committee in its latest minutes. Other risks include persistent services inflation, inflationary pressures stemming from both external and domestic factors (such as sustained BRL depreciation), and demand-support measures. Meanwhile, downside risks include a sharper-than-expected economic slowdown and its disinflationary effects, a more pronounced global deceleration, and lower commodity prices.

Analysts polled by the BCB raised their 2028 inflation forecast, the Copom's relevant policy horizon, to 3.80% from 3.78% a week earlier, according to the latest Focus Report. This remains well above the BCB's own forecast of 3.10% by end-2028. Galípolo said it is difficult to determine whether the increase in long-term inflation expectations reflects factors already in place or anticipated future policy measures. Together with still resilient, albeit moderating, economic activity, he said the current environment warrants maintaining a restrictive monetary policy for longer, reinforcing the view that the Selic rate will remain restrictive even after the current "calibration" cycle ends.

It is worth noting that lower inflation in 2026 could help improve inflation expectations as indexation mechanisms continue to play an important role in Brazil's inflation dynamics. However, we expect this effect to be limited given persistent fiscal concerns and potential supply-side shocks, including from El Niño and the ongoing conflict in the Middle East.

Overall, the downside surprise in July's IPCA-15 print reinforces our expectation that the BCB will cut the Selic rate by 25bps to 14.00% at its August policy meeting. However, elevated external uncertainty stemming from the Middle East and US economic policy, renewed demand-driven inflationary pressures highlighted in the Copom's latest minutes, and persistently de-anchored inflation expectations are likely to compel the committee to keep a hawkish stance. As a result, we do not expect the Copom to provide forward guidance. In our view, the next cut is likely to be the final one in the current calibration cycle before the committee pauses to reassess the inflation outlook amid elevated uncertainty, although policy decisions beyond August will remain data-dependent.

• Next MPC meeting: Aug 6, 2026
• Current policy rate: 3.75%
• EmergingMarketWatch forecast: Hold

Rationale: After the first rate hike in 4 years, we believe the CNB board will hold rates unchanged for now, especially after repeated assurances that the June hike was not the start of a new tightening cycle. The latest remarks from Governor Ales Michl and board member Jan Kubicek broadly reinforce that view. Kubicek acknowledged that another rate hike could be discussed in August, but stressed there was no need to move quickly and suggested that one additional increase by year-end could be sufficient. We therefore continue to expect one more rate hike in 2026, given that the reasons behind the June move are unlikely to disappear. Namely, the labour market is likely to remain relatively tight, particularly in the service sector, while consumer lending growth is unlikely to slow down materially in the near term. Kubicek also highlighted wage dynamics, credit growth, house prices and the limited pass-through of higher longer-term rates into loan pricing as the key indicators he is watching. Even though there are some anecdotal reports that property price growth is slowing down, we doubt rising mortgage rates will be a major deterrent to housing loan growth. The latest data on mortgage approvals supports that view, with lending driven by expectations of further property price growth.

You may note that we are excluding any mention of price data, but the reason is mostly because this is what the CNB board did in June. CPI inflation eased to 1.5% y/y in June, which is considerably below the CNB's forecast of 2.1% y/y. Moreover, CNB staff shifted their expectations and now project inflation to remain around or slightly above 2% y/y during the rest of 2026. However, the CNB board argued that underlying inflation pressure remains elevated and that price stability cannot be secured before core inflation slows more convincingly. Jakub Seidler doubled down by arguing that volatile prices were behind the softer June inflation print, while core inflation would remain close to the upper end of the CNB's tolerance band (2%+/-1pp). Kubicek struck a similar tone, describing the inflation picture as mixed. While headline inflation was pulled down mainly by food prices, services inflation remained elevated at 4.5% y/y and core inflation stood at 2.8%, reinforcing the board's focus on underlying price pressures rather than headline volatility. Michl has also continued to stress that domestic inflation risks outweigh calls for lower interest rates. With this rationale, current price data carries less weight, so we do not expect the CNB board's view to shift even if inflation remains below 2% y/y in July. Seidler's latest remarks reinforce that view, as he favours an August hold amid slower lending, easing services inflation and softer inflation expectations, while still warning that temporary food and electricity effects understate medium-term price pressures. What another benign inflation print could do is postpone the additional 25bps rate hike we expect before the end of 2026, which is why we expect stable interest rates in August.

At this point, we are still uncertain about the timing of that second hike, though we believe it will arrive no later than November. If money supply and nominal wage growth show no signs of easing by the September MPC meeting, the odds would favour another 25bps hike then. On the other hand, if growth softens and inflation continues to undershoot the CNB's projections, the next increase could instead come in November. Kubicek's latest remarks are consistent with that view. He left both the timing and the decision open, while also pushing back against market pricing for as many as three additional hikes by Q1/2027. We likewise doubt that the CNB board will push the policy rate beyond 4.00%, unless core inflation starts accelerating again and rises above 3% y/y. Naturally, a renewed escalation of the conflict in the Middle East would also strengthen the case for tighter monetary policy because of higher energy prices. Once the CNB is satisfied that inflation is contained, we expect the policy rate to return to 3.50% around the middle of 2027. However, we do not expect further easing, given that ETS2 is still scheduled to be implemented at the beginning of 2028. According to the latest available CNB analysis, the direct impact on inflation is projected at 0.4pps, while second-round effects could add around 0.2pps.

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• Next MPC meeting: Aug 20, 2026
• Current policy rate: 19.5%
• EmergingMarketWatch forecast: 19.5%

The next MPC meeting is in August, and we think the committee will keep interest rates on hold as geopolitical risks have intensified again. The MPC's decision to keep the main policy rate unchanged at 19.5% for a third consecutive meeting in July reflects its cautious monetary policy approach amid elevated supply-side inflationary risks. Further, CPI inflation is expected to quicken during Q3 due to a low base effect, so a rate cut seems unlikely even if the US and Iran reach a new agreement. Further, capital outflows intensified in July, which makes a rate cut look unlikely at the moment. The central bank has recently revised up its inflation forecasts for the medium term because of the Middle East conflict, as Egypt is vulnerable to supply line disruptions, energy imports, and investor sentiment. CBE expects annual inflation to average 16-17% y/y in 2026 - thus exceeding the 7% +/- target for Q4 2026 - before moderating to 12-13% in 2027 and eventually falling to single digits during H2 2027.

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Overall, despite more than four months of heightened uncertainty, Egypt appears stable and resilient to the regional crisis. This was not the first time CBE was confronted with capital flight triggered by a major external shock. Importantly, the CBE has refrained from intervening in the FX market to shore up the pound, consistent with its commitment to a flexible FX regime and the broader policy framework agreed with the IMF. The pound has weakened in recent days on the back of portfolio outflows triggered by the new hostilities in the Gulf.

Monetary Policy Committee Statement

Monetary Policy Review

Monetary Policy Committee Meeting Schedule

• Next MPC meeting: Aug 25, 2026
• Current policy rate: 5.75%
• EmergingMarketWatch forecast: 25bps rate cut
• Rationale: Inflation continues to run below expectations, Mid-East conflict does not shake MPC resolve to continue rate cuts till September

The monetary easing cycle is set to continue in August, based on the monetary policy guidance issued by the MPC at its rate-setting meeting in July. The MPC continued the rate-cut cycle with a 25bps rate cut in June, matching the policy path that was set out in June. Importantly, the policy guidance remained geared towards additional loosening as the MPC reiterated that it saw room for further cuts in the summer in case the favourable developments persisted. The July rate decision and guidance came with the background of renewed hostilities in the Middle East and renewed rise in global energy prices, so the MPC was clearly undeterred in its loosening policy by these developments. We therefore see no reason for the MPC to back off in August. Fuel prices have remained comparable to the former price caps for the time being, so the upcoming inflation data should remain modest and should not present grounds for calling off the announced rate cut, in our view. The impact of the escalation of the Iranian conflict was probably only a shift against more aggressive rate cuts, we think. External MPC member Zoltan Kovacs had voted for a steeper 50bps rate cut in June, while the July decision for a 25bps rate cut was unanimous, according to the post-meeting statements of NBH governor Mihaly Varga.

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The rate-cut cycle will be reconsidered in September, based on the updated NBH forecast in the next Inflation Report, the MPC confirmed in July. It maintained the emphasis that the real interest rate will be kept positive during the easing cycle, which we consider a sign for its preference for a stronger forint. Varga acknowledged the recent forint depreciation, speaking after the July meeting, but stressed that the NBH did not have an exchange rate target. The forint can be considered neither strong nor weak at present but it has remained stable, he commented and added that the NBH rather looks to avoid the significant swings in the exchange rate that were characteristic for the past periods. We think that he still implicitly defended a stronger forint as he stood by the need for a high real interest rate for the sake of guaranteed access to financing. The MPC also reiterated in its July decision text its focus on financial market stability, especially forint stability, in order to anchor inflation expectations and support price stability.

Lower-than-expected inflation and moderating inflation expectations created opportunities for easing, the MPC explained in July. The decline in the domestic risk premium proved to be sustained as well, it remarked, although it indirectly admitted that the easing stance was subject to constraints from expectations for rate tightening by the ECB, the Federal Reserve and the Bank of Japan.

Post-meeting MPC statement from July rate-setting meeting

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

Minutes from June MPC rate meeting

Inflation Report - Q2/2026

MPC meeting calendar 2026

• Next MPC Meeting: August 3-5, 2026
• Current policy rate: 5.25%
• Last decision: Hold, June 5, 2026
• Our forecast: Hold
• Rationale: The RBI is likely to keep rates unchanged in August, but the room for a passive pause has narrowed sharply. Inflation is now above the 4% midpoint, producer-price pressures remain elevated and the external account is under renewed stress. The central bank will still look through part of the oil-driven supply shock, but it can no longer sound dovish, in our view.

We expect the Reserve Bank of India to keep the repo rate unchanged at 5.25% at its upcoming August policy meeting. The MPC's June 3-5 meeting delivered a unanimous hold, the third consecutive pause. In our view, that decision effectively marked the end of the easing cycle, during which the RBI delivered cumulative cuts of 125bps between February and December 2025. The case for another hold rests on the fact that the current inflation shock is still largely supply-led, driven by fuel, food, commodity and import-price pressures rather than excessive domestic demand. However, the case for doing nothing beyond holding rates has weakened. Recent data show that inflation risks have broadened, the trade deficit has widened and external buffers are being used more actively to manage rupee volatility. The August policy statement is therefore likely to retain the repo rate, but with a clearly more cautious tone.

Inflation environment

Retail inflation rose to 4.4% y/y in June from 3.9% in May, moving above the RBI's 4% medium-term target for the first time since January 2025. The increase was driven by higher food and fuel prices, the impact of the West Asia conflict and the early-season weakness in the monsoon. Although inflation remains within the RBI's 2-6% tolerance band, the move above the midpoint is important because it reduces the central bank's room to look through price shocks.

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Wholesale inflation also remains elevated. WPI inflation increased to 9.9% in June. The new producer price data reinforce the same story. The Output PPI rose to 9.6% y/y. Food inflation is the key domestic risk. The southwest monsoon deficit narrowed in early July after heavy rainfall, but cumulative rainfall remained deficient and the regional distribution was uneven. East and northeast India continued to face a large shortfall, raising risks for paddy, pulses and oilseeds. If rainfall weakens again later in July, food-price pressure could become more persistent. Fuel remains the bigger external risk. Retail prices for petrol and diesel have already been raised since May, and higher global energy prices are feeding into transportation, logistics and input costs. Commercial LPG and aviation turbine fuel prices were reduced in July as global oil prices eased, but domestic household LPG prices remain unchanged and the underlying energy-price outlook is still vulnerable to any renewed escalation in West Asia.

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Growth

The growth backdrop remains resilient, but no longer gives the RBI a free hand. The RBI revised its FY27 GDP growth projection down to 6.6% in June from 6.9% in April, citing the West Asia conflict, higher crude prices and weather-related risks. This is broadly in line with recent external forecasts. The Asian Development Bank has lowered India's FY27 growth forecast to 6.6%, while the IMF has cut its estimate to 6.4%.

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High-frequency indicators point to steady but moderating momentum. The services PMI remained firmly in expansion territory at 57.4 in June, but fell from 59.8 in May and marked the weakest pace of growth in 17 months. New order growth slowed to its weakest level in more than two-and-a-half years, hiring was broadly paused and business confidence fell to a five-month low. This suggests that the services economy is still expanding, but the acceleration phase has faded. GST collections also point to resilient nominal activity. Gross GST collections rose 14% y/y to about INR 1.95tn in June, close to the INR 2tn mark. However, import-related GST rose 34.6%, far outpacing the 6.5% rise in domestic collections. This supports the revenue picture, but also suggests that the headline number is being flattered by import activity rather than purely broad-based domestic demand.

External sector

The external sector has become the main constraint on monetary policy. India's merchandise trade deficit widened to a five-month high of USD 30.4bn in June from USD 28.2bn in May and USD 19.1bn a year earlier. Imports rose 31% y/y to USD 70.8bn, outpacing a healthy 16% rise in exports to USD 40.4bn. The import surge was driven by crude oil, electronics and gold. This mix is important. Oil reflects the energy shock, electronics reflect domestic and investment demand, while gold points to continued pressure from household demand for imported stores of value.

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The rupee remains vulnerable to higher oil prices, foreign portfolio outflows and a stronger US dollar. The RBI has also been using forward-market intervention, with its net short forward dollar position rising sharply in recent months. This gives the central bank tools to manage volatility, but it also means external defence is becoming more costly.

Policy outlook

The RBI's August decision is likely to be a hold, but the tone should be meaningfully less relaxed than in June. A rate hike is not likely because the inflation shock is still supply-led and growth momentum is moderating. Raising rates too early would not bring down oil prices or improve the monsoon, but it could tighten financial conditions for households and firms at a time when demand is becoming less broad-based. However, the scope for an easy pause has narrowed. The RBI will therefore need to signal that it is ready to act if second-round effects emerge, inflation expectations rise or the rupee comes under renewed pressure.

Further Readings

Monetary policy statement

Governor's statement

• Next policy meeting: Aug 18-19
• Current policy rate: 5.75%
• Our forecast: Hike by 25bps or Hold
• Last decision: Hold (Jul 21-22)
• Rationale: Bank Indonesia statement of Jul 22; resignation of Governor Perry Warjiyo; rupiah depreciation

We think that a policy rate increase by 25bps and a hold decision are both possible at the next MPC meeting on Aug 18-19. Last week, Bank Indonesia (BI) kept the key rate unchanged at 5.75%. The hold decision was in line with our expectations. At the same time, such a decision was predicted by 13 economists in a Reuters poll, whereas 20 forecast a 25bp hike. In May and June, BI made three policy rate hikes totalling 100bps.

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BI Governor Perry Warjiyo resigned due to personal reasons; it was announced on Monday. The Board of Governors appointed Senior Deputy Governor Destry Damayanti as Acting Governor. The new permanent BI governor must be nominated by President Prabowo Subianto and approved by the parliament. The president has not announced the nomination yet.

The rupiah is trading at USD/IDR 18,075 at the time of writing, which compares with USD/IDR 17,880 on Jul 22. If the exchange rate stays above the 18,000 threshold, BI may raise the policy rate next month, in our view. A hold decision is also a distinct possibility for the August meeting, given BI's rate hikes in May and June.

GDP growth

We remind that GDP growth accelerated to 5.61% y/y in Q1 2026 from 5.39% y/y in Q4 2025. Last week, BI said that the country's economic growth remains resilient, supported by domestic demand. According to BI, government consumption grew strongly in Q2. The central bank's assessment is that household consumption has stayed resilient, benefiting from various government stimulus measures. BI said that investment was supported mainly by the implementation of the National Priority Work Program (PKPN), whereas there is a need to further strengthen private investment. BI sees a need for continued improvement in export performance to take advantage of increasing international commodity prices.

The second-quarter GDP data will be announced on Aug 5.

All in all, BI maintained its 2026 GDP growth forecast at 4.9-5.7%.

On a related note, business activity growth accelerated in Q2 as the Net Weighted Balance (NWB) indicator rose to 12.97, up from 10.11 in Q1, according to BI's survey. This was the strongest reading since Q3 2024.

The IMF kept its GDP growth forecasts for Indonesia unchanged for 2026-2027, according to the July update of the World Economic Outlook. The economy will expand by 5.0% this year, easing slightly from 5.1% growth in 2025, while economic growth will gain pace to 5.1% in 2027.

The ADB kept its GDP growth forecasts for Indonesia unchanged for 2026-2027, according to the July update of its Asian Development Outlook. Economic growth is seen at 5.2% in both years, the same as the ADB's forecast in April.

Exchange rate stability

Last week, BI reported that the USD/IDR exchange rate was 17,885 on Jul 21, little changed from USD/IDR 17,880 at end-June. The rupiah is trading at USD/IDR 18,075 at the time of writing, which compares with USD/IDR 16,675 at end-2025.

Some of the measures approved on Jul 21-22 included expansions of the incentive policy to boost portfolio inflows, strengthen rupiah exchange rate stability and speed up the deepening of the money and foreign exchange markets. BI said that it will further expand its incentive policy to attract foreign capital inflows and strengthen the exchange rate stability of the Indonesian currency going forward.

Inflation environment

CPI inflation accelerated to 3.34% y/y in June from 3.08% y/y in May. BI's target band is 2.5%+/-1pp. Core inflation also gained pace to 2.76% y/y in June, up from 2.59% y/y in May.

Going forward, BI will continue to enhance its monetary policy mix and strengthen synergy with both the central and regional governments to keep inflation within the target band this year and next year, the press release said. The CPI data for July will be released on Aug 3.

The ADB raised its CPI inflation forecast to 3.0% this year, up from 2.5% projected in April, reflecting the second-round impact of the oil price spike in Q2. Inflation would then decelerate to 2.5% in 2027.

Further reading

Last regular MPC press release

Calendar of MPC meetings

• Next MPC meeting: August 6
• Current policy rate: 6.50%
• EmergingMarketWatch forecast: Hold

We are confident that the CB will not adjust its Monetary Policy Rate (MPR) next Thursday, holding it at 6.50%. This is consistent with the comments made in the latest sitting, when the board unanimously held the rate at that position and with the latest minutes, which failed to show when the next move will come but was clear to suggest no rate moves are likely during the rest of the year. Indeed, we are confident the decision to hold will be unanimous.

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With this, the next sitting is unlikely to give the market any useful information, with the CB saying it believes its current monetary policy is consistent with its goal of having CPI inflation slow to its 3.00% punctual target. However, we believe there is a chance the CB will be lifting its 2027 inflation forecasts in this sitting, given lingering service pressure and recent comments by Deputy Governor José Gabriel Cuadra. We believe the more likely scenario is for the CB to wait until September, and we won't be too surprised if it waits until November, to adjust its 2027 forecasts, recognizing inflation will not slow to meet the punctual target by Q2 2027 (read our reasoning here).

A revision of mid-term inflationary forecasts might seem odd at a time CPI inflation has slowed quickly, to 3.37% y/y in June. However, we note this deceleration came almost fully on the back of non-core inflation, which is naturally volatile and cannot drive the CB's monetary policy. On the contrary, while core inflation slowed notably in Q2, it marks 14 months above 4.00%, with service prices not showing significant disinflation and adding 55 months with inflation above 4.00%.

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We expect the debate on service prices to be crucial in the coming sittings, although the sitting communiqués are unlikely to show so, with the minutes being a better way to understand the Monetary Policy Council's (MPC) view of these sticky prices. We insist service inflation might be showing the upward pressure brought by growing real wages, which persist despite poor economic growth and unlikely productivity gains. Indeed, new two-digit increases to the minimum wage over the next few years will add to this pressure.

Some board members have claimed the resilience of service prices might be also reflecting a change in relative prices that shouldn't worry the CB too much. Particularly Deputy Governor Omar Mejía, the most dovish board member, in our view. However, while a relative price adjustment cannot be disregarded, the pressure is enough and broad enough to prevent a deceleration of core inflation to 3.00% in the foreseeable horizon, suggesting the CB will need to pay attention to service prices if it plans to have general inflation ever converge to its punctual target.

The 2026-end CPI inflation consensus continued to decline in mid-July, with analysts now expecting inflation will close the year at 4.09%, down by 0.26pps over the last three fortnights. In turn, the 2027-end consensus sits at 3.80%. While these forecasts are likely to decline further if the current disinflation persists, these projections show a wide gap with the CB's forecasts, suggesting the CB will have to significantly lift its optimistic 2027 projections.

All in all, we continue to believe the chances of a Monetary Policy Rate (MPR) cut by year end are very low, despite the dovish stance of most of the board and the positive performance by non-core inflation seen recently. Indeed, we believe easing in 2027 cannot be disregarded, even as the market consensus continues to anticipate stability throughout this and the next year. In the latest minute, only one board member said the CB should hold its MPR steady over the next nine months, at least. We fully assume this was the position of Deputy Governor Jonathan Heath, the lone hawk on the MPC, whose term is set to expire at the end of the year.

On this, we insist the CB's credibility will depend much on who President Claudia Sheinbaum appoints to join the board next year, taking the seat of Deputy Governor Heath. We continue to assume the president will select a candidate with the right credentials, probably someone respected from within the CB. We'd like to see her replace the outside role played by Heath by picking someone respected and linked to the private sector, although we do not expect this. In any case, selecting a new loyalist, as we see Governor Victoria Rodríguez and Deputy Governor Mejía, would significantly weaken the CB's credibility, in our view.

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

• Next MPC meeting: 21 - 22 September
• Current policy rate: 26.5%
• EmergingMarketWatch July forecast: 26.5%

The MPC decided to maintain the benchmark interest rate at 26.5% on Tuesday (July 21), the second consecutive hold this year. These holds follow a 50bps cut at the February meeting. Economists widely expected the committee to hold this week given ongoing uncertainty over resolutions in the Middle East conflict, in addition to persistent risks from exchange rate volatility and food and energy prices. The latest MPC meeting comes after June's inflation print showed a minor drop to 15.91% y/y from 15.93% y/y in May, after three consecutive months of rising inflation. The slight easing of headline inflation was not enough to justify a cut. Speaking at a briefing after the MPC meeting, CBN governor Olayemi Cardoso said MPC members unanimously agreed to keep the benchmark rate unchanged. He indicated that the committee weighed risks from developments such as uncertainties in the US economy and the Middle East conflict.

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All 11 members of the MPC attended the two-day meeting. (We note that Lydia Shehu Jafiya is no longer an MPC member due to her retirement from the civil service in December, and she has not been replaced). The committee's continued tight monetary policy stance reflects their strategy to sustain the easing of inflation amid the ongoing risks. Despite June's small headline moderation, food inflation is extremely elevated and continues to climb. Food inflation increased to 17.5% y/y in June from 17% y/y in May (fifth consecutive rise). The MPC will want to see a return to moderating price pressures in this sector.

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

In summary, the MPC voted to:

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

Monetary Policy Committee Statement

Monetary Policy Committee Meeting Schedule

Next policy meeting: September 14, 2026

• Current policy rate: 11.50%
• Last decision: Hold (July 27, 2026)
• Our forecast: Hold
• Rationale: Inflation outlook improves while external account seen manageable

The State Bank of Pakistan (SBP) kept the policy rate unchanged at 11.5% in its first meeting of FY27, in line with market expectations. The decision was unanimous compared with one member of the monetary policy committee voting for a hike in the June meeting. This suggests that the panel turned more neutral as the macroeconomic outlook improved. Inflation appears to have peaked in May, inflation expectations have eased, external pressures remain modest, and economic activity is recovering after slowing in April and May. While inflation remains elevated, the SBP considered the current, slightly restrictive monetary policy stance as appropriate to guide inflation towards its 5%-7% target range. It expected the goal to be achieved by June 2027.

The SBP appears to have looked through the recent escalation of hostilities in the Middle East and the subsequent rise in global oil prices, perhaps expecting the latest flare-up to be temporary. Its favourable inflation outlook also supports this view. This contrasts with its 100bps rate hike in April, when the central bank raised its benchmark rate for the first time in nearly three years in response to the conflict.

Inflation environment

The SBP turned slightly more comfortable with the inflation trajectory than before. It no longer sees inflation remaining in double digits over the next few months, as stated in the previous two monetary policy statements. CPI inflation eased to 11.1% y/y in June from a nearly two-year high of 11.7%, mainly due to a softer increase in fuel and electricity prices. Still, inflation stayed above the SBP's 5%-7% target range for the fourth consecutive month and is likely to remain above it in the near term. Core inflation also slowed but remained elevated at 8.4%, down from 8.7% in May. Consumer and business inflation expectations declined for a second straight month in June, suggesting expectations remain broadly anchored. Inflation may moderate further in July as the impact of last year's gas tariff hike drops out of the base and jewellery prices fall, though higher energy, food, and transport services prices are likely to keep upward pressure.

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External sector

The SBP maintained a fairly optimistic view on the external account. It expected the current account deficit to stay manageable at 0%-1% of GDP in FY27, even though it is likely to widen from just USD 139mn, or 0.03% of GDP, in FY26. The outlook is supported by strong workers' remittances, which are projected to rise 5.1% y/y to a fresh record of USD 44bn. This suggests the central bank expects remittance inflows to remain resilient despite tensions in the Middle East. Exports are also expected to recover, helped by a rebound in rice shipments after a weak FY26, when stronger global competition weighed on the sector. Total exports fell 4.6% y/y in FY26. However, imports are likely to rise further after increasing 9% y/y in FY26, as stronger economic activity boosts demand for imported goods. Higher-for-longer global energy prices remain another key risk.

The SBP expected foreign exchange reserves to continue rising, targeting to lift reserves to an all-time high of USD 20.2bn by end-December 2026. Reserves stood at USD 17.3bn as of July 17, down from USD 18.5bn two weeks earlier due to large debt repayments. Continued forex purchases from the interbank market, fresh loan inflows, and bilateral debt rollovers are expected to support reserve accumulation.

Meanwhile, external debt repayment pressure is also expected to ease this fiscal year. Gross repayments are projected at USD 21.5bn, down from USD 26.5bn in FY26. Of the USD 18bn in principal repayments, around USD 10bn-11bn is expected to be rolled over or refinanced, leaving net principal repayments of about USD 7.5bn. Interest payments are expected to fall to USD 3.5bn from USD 4bn in FY26. Overall, debt-related outflows are estimated at around USD 11bn in FY27.

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GDP growth

The SBP expressed confidence that Pakistan's economy will strengthen further in FY27, supported by improved farm output, budgetary incentives, continuation of import tariff rationalisation, and increase in private sector credit. GDP growth is projected in the range of 3.5%-4.5%, up from an estimated 3.7% in FY26. It noted that economic activity picked up in June after recording some slowdown in April and May on account of the Middle East conflict, surge in global energy prices, and austerity measures taken by the government. However, risks emanating from volatile global commodity prices amidst re-escalation of tensions in the Middle East and uncertain weather conditions, including from the evolving El Niño effects, may weigh on the growth prospects, the central bank added.

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Conclusion

We expect the SBP to remain on hold for an extended period as the external sector remains stable and supply-driven inflation eases, with the normalization of base effects providing additional support. That said, the central bank reiterated its commitment to price stability and said it will continue to closely monitor incoming data and evolving developments. This signals that it stands ready to tighten policy if price pressures emerge. A sharp rise in global oil prices, unexpected increases in administered energy prices, or adverse climate conditions could alter its inflation outlook and rate path.

Further Readings

Previous policy rate decisions

Minutes of MPC meetings

Latest IMF staff report

• Next monetary policy meeting: Aug 27
• Current policy rate: 4.75%
• EmergingMarketWatch forecast: Hike by 25bps
• Rationale: CPI for June; comments by Governor Remolona; new forecasts by DBCC, IMF, ADB; peso weakness

We think that BSP's Monetary Board (MB) will likely raise the policy interest rate by 25bps in its meeting on Aug 27. In June, the MB decided to increase the BSP's Target Reverse Repurchase (RRP) Rate by 25bps to 4.75%. The decision was in line with expectations. It was the second consecutive rate hike.

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The main argument in favour of another policy rate increase is the high consumer price inflation. Although the y/y CPI growth decelerated for the second consecutive month in June, it remained significantly above the 3±1% tolerance range. The weakness of the peso against the US dollar also supports the expectation of another rate hike.

In his State of the Nation Address (SONA) delivered on Monday, President Ferdinand Marcos Jr. called for a number of tax reforms, such as a higher threshold for income tax exemptions for low- and middle-income earners and tax breaks for micro, small, and medium enterprises. On Tuesday, BSP Governor Eli Remolona Jr. said that they are still estimating the impact of the reforms on inflation, the BusinessWorld reported. The larger impact will take place next year, and the smaller one in 2028.

Remolona also said that the central bank was still assessing the impact on inflation of the PHP 85 daily wage hike for workers in Metro Manila, the Philippine Daily Inquirer reported. The governor continues to anticipate improved economic performance in H2. He also played down the latest tariff move by the US.

There is a "small chance" of more aggressive monetary policy tightening this year, according to Remolona. He did not rule out an off-cycle meeting either.

Inflation

CPI inflation decelerated to 6.4% y/y in June from 6.8% y/y in May. The CPI has risen by 4.8% y/y in H1. On the other hand, core inflation sped up to 4.4% y/y in June from 4.1% y/y in May.

The Development Budget Coordination Committee (DBCC) forecasts average inflation in the range 6.0-7.0% in 2026. The projection reflects high global fuel prices, continuing supply-side pressures, as well as surfacing second-round effects of the conflict in the Middle East. The DBCC expects inflation to ease to 4.0-5.0% next year and 2.0-4.0% from 2028-2030.

In July, the Asian Development Bank (ADB) raised its inflation forecast for 2026 to 5.9% from 4.0% in April. Next year's inflation forecast was revised up to 3.9% from 3.5%.

Meanwhile, the producer price index rose by 2.9% y/y in May, accelerating from 2.6% y/y in April, the statistics office said.

Economic growth

The country's latest GDP growth targets determined by the DBCC are 3.5-4.5% for 2026 and 5.0-6.0% for 2027-2030. The Philippine economy expanded by 4.4% in 2025. The previous DBCC meeting was held in December 2025 and the growth targets were 5.0-6.0% for 2026, 5.5-6.5% for 2027 and 6.0-7.0% for 2028-2030.

With regard to the moderation of growth this year, the DBCC noted increased domestic and external uncertainties, as well as geopolitical tensions in the Middle East. The high inflation in 2026 may weigh on household consumption and investments. Other negative factors include potentially slower growth of remittances and visitor arrivals. In addition, the looming El Niño in H2 may affect the agricultural production and disrupt economic activities, if there are no appropriate disaster preparedness and resilience measures.

The IMF cut its GDP growth forecast for the Philippines to 3.9% in 2026, down from 4.1% projected in April, according to the July update of the World Economic Outlook. Looking forward, GDP growth will accelerate to 5.5% in 2027, though this is still worse than the 5.8% growth forecast back in April.

The ADB forecasts that the Philippines' GDP will rise by 3.8% in 2026 and 5.3% in 2027, the ADB said in the July edition of its Asian Development Outlook. In April, the two growth rates were expected to be 4.4% and 5.5%, respectively. The downward revisions reflect delayed investments and weaker private consumption in the context of elevated commodity prices and climate-related risks.

LFS, lending

The unemployment rate increased to 4.8% in May from 4.7% in April and 3.9% in May 2025, according to the results of the latest labour force survey (LFS). In the y/y comparison, the number of unemployed rose by 22.8% to 2.50mn in May. The number of employed fell by 1.3% y/y to 49.63mn. The labour force thus dropped by 0.4% y/y to 52.13mn.

Outstanding loans of universal and commercial banks, net of reverse repurchase (RRP) placements with the BSP, rose by 12.1% y/y at end-May, speeding up from 11.4% y/y at end-April, the BSP said.

Exchange rate

The peso is trading at USD/PHP 61.373 at the time of writing, which compares with USD/PHP 60.595 on Jun 18, the date of the latest MB meeting.

The DBCC now assumes an exchange rate of USD/PHP 60-62 from 2026-2030, which compares with the previously expected 58-60.

On Tuesday, Remolona said that the weaker peso could increase inflation. However, if this reflects a strong dollar, the BSP intervenes only to maintain orderly markets, according to him.

Further reading

Press release after Jun 18 monetary policy action

Schedule of monetary policy meetings

Highlights of MB meetings on monetary policy

Monetary Policy Report

• Next MPC meeting: Sep 8-9, 2026
• Current policy rate: 3.75%
• EmergingMarketWatch forecast: 3.75%

Rationale: NBP and Monetary Policy Council head Adam Glapinski did not only go dovish in his July press conference, he talked about a possible motion to cut interest rates by 25bps as soon as the September sitting. For a situation in which some were still speculating about whether the MPC might hike rates, this was something of a surprise. Glapinski said that though other MPC members were more 'cautiously dovish,' he was less cautious and, based on a July update of the inflation projection that showed inflation in the target range for the entire policy horizon, Glapinski said rates could still fall this year, though they would definitely fall by early 2027 or so.

Glapinski's comments helped lead to a sell-off of the PLN, which, though still relatively strong, is down to levels not seen for some time. That has led at least one Monetary Policy Council member to say the weaker PLN might be an inflation problem itself, though council members tend to downplay the impact of relatively small changes in the exchange rate on inflation.

But even Glapinski would probably note that the situation in the Middle East is much riskier for future inflation than seemed earlier in July. The US and Iran are trading strikes and, though the US would seem to have an interest in cooling the situation down ahead of the mid-term elections in November, it is hard to say when this will happen. The government ended its fuel-tax cut program on Jun 30, a time when relative peace in the Middle East appeared likely to keep oil prices down. But the escalation of the Iran situation and the ending of the tax-cut scheme have led retail fuel prices to shoot higher, and CPI inflation will be lifted by some 0.4-0.5pp, if not more, in July.

CPI inflation was confirmed slowing to 2.5% y/y in June from 3.1% in May, thereby hitting the centre of the NBP's 2.5% y/y +/-1-pp inflation target and remaining well within the target range. But the fuel impact in July will likely lift inflation back toward 3% and create risks of second-round effects, even if this latter element has been scant so far. Core inflation is set to be some 3.0% y/y in June and could tick up in July, suggesting there is still some underlying inflation. Services inflation is nearly 6% y/y as well.

Overall, Glapinski's dovish turn might even have led to a cut as soon as September if the Iran situation had not worsened and threatened to spin out of control. Oil prices are up, and, with the PLN also weaker to the USD, retail fuel prices are pushing well up and that alone will boost CPI inflation in July and likely in August as well, though the August outlook is less clear. The government, for one, is talking about returning to the fuel-tax cut scheme, which might help reduce the impact of fuel on inflation. Against this backdrop, it seems likely that the MPC will be more "cautious" than "dovish" in the near future and only consider cuts later when the Middle East situation is more predictable.

MPC's post-sitting statements

Latest council minutes

Latest NBP inflation report (July 2026)

Most recent MPC voting results

Archived video of all MPC press conferences

• Next MPC meeting: Jul 23, 2026
• Current policy rate: 37.0%
• EmergingMarketWatch forecast: Hold
• Rationale: Renewed geopolitical risks, political uncertainty and fragile reserves leave no room for easing

We expect the CBT to keep the policy rate unchanged at 37.0% at the forthcoming MPC meeting. The liquidity angle still deserves attention. Since the start of the Iran war, the CBT has not relied on the one-week repo channel in any meaningful way. It has instead funded the market mainly through the overnight lending window, where the rate stands at 40.0%. Against that backdrop, we do not rule out a return to one-week repo funding around the upcoming meeting.

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The headwinds remain familiar: politics and reserves. Based on the latest available weekly figures, gross reserves remain around USD 160bn. As gold still accounts for a significant share of the total, fluctuations in its price continue to affect the headline reserve level. That said, reserves remain well below their peak reached in spring. Fitch recently noted that reserve developments remain one of the key indicators it continues to monitor when assessing Turkey's macroeconomic stability and policy credibility.

On the domestic side, the political climate surrounding CHP's former leader Ozgur Ozel remains the main risk. Further legal or political pressure on him, and potentially on Ankara mayor Mansur Yavas, could still unsettle markets, in our view. That risk has become even more relevant following Ozel's announcement yesterday that he will establish a new political party, we assess. For now, however, the available figures do not point to a meaningful increase in local FX demand, giving the CBT some room to manage the current policy setting. Political shocks can nevertheless alter market expectations quickly, especially while reserve credibility and confidence in the disinflation process remain closely intertwined, we note.

The renewed escalation between Iran and the US has also reversed what briefly appeared to be a supportive external backdrop for Turkey, we note. The collapse of the ceasefire and the renewed clashes have pushed global oil prices higher again, creating fresh upside risks for Turkey's energy import bill, inflation outlook and CA dynamics, we assess. The direct impact will depend on how persistent the tensions prove to be, but a prolonged period of elevated oil prices would clearly complicate the CBT's disinflation path, we caution.

Overall, we think the CBT has entered an increasingly uncomfortable policy corner. Domestic demand continues to soften, yet underlying supply-side inflation remains too strong to justify easier monetary conditions, in our view. At the same time, the current pace of TRY depreciation neither creates sufficient room for rate cuts nor provides enough support to restore the external competitiveness of the real sector, we think. It is also becoming less supportive for carry trade, we note. With the pace of USD/TRY depreciation now eroding a larger share of the nominal yield, the risk-adjusted return has become less compelling, helping explain why several international institutions have recently turned more cautious on TRY carry positions, we underline. Slowing the pace of depreciation further would reinforce concerns over an already overvalued TRY, weighing more heavily on exporters and raising risks for the CA. Allowing faster depreciation, by contrast, would risk reigniting inflation just as the disinflation process remains incomplete. The renewed rise in oil prices has narrowed the CBT's room for manoeuvre even further. In our view, none of the available policy options looks painless anymore. The longer this balancing act continues, the more likely it becomes that the eventual exit will require accepting either weaker growth and prolonged pressure on the real economy or a slower and more volatile disinflation path.

Summary of June rate-setting meeting

MPC rate decision in June

Quarterly Inflation Report for Q2

Monetary policy strategy for 2026

• Next MPC meeting: July 28
• Current policy rate: 4.50%
• EmergingMarketWatch forecast: 4.50%

Summary

The verbal and non-verbal guidance delivered by the Monetary Policy Council following its unanimous MPR hold at 4.50% in the Jun 16 meeting implied that the set of inflation risks became more balanced after the recent developments in the Middle East, reinforcing the idea that the benchmark rate is likely to remain on hold during this temporary period of above-target inflation. In the absence of new inflationary shocks, the central bank's baseline forecast sees inflation gradually returning to the 3.0% target by Q2 or Q3 next year. If this inflation scenario materializes and GDP growth keeps converging toward its potential level, the MPR would likely be on hold for the next 3-4 quarters, and at that point a 25bps cut that takes the MPR to its neutral level becomes an option.

However, the MPC has been emphasizing that the macroeconomic scenario is subject to a greater-than-usual degree of uncertainty, which requires a careful meeting-by-meeting review of the monetary policy stance. The BCCh's latest monetary policy corridor was symmetrical, suggesting that the probability of hikes or cuts over the next few quarters is balanced, even if a move remains unlikely in the absence of a new shock.

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Background

On inflation, the current environment is characterized by a 3.9% y/y inflation rate, which is above the 3.0% monetary policy target. The external energy price shock pushed inflation above 3.0%, while core inflation remained well behaved at 3.2% y/y. Since Chile passed through most of the initial spike in global oil prices, it is now starting to see gasoline prices decline. If the recent decline in global oil prices sustains, the coming decline in local gasoline prices will directly reduce inflation, and indirectly cut off any remaining second-round effects from the initial price spike, accelerating the convergence of inflation down to 3.0%. Expected inflation two years ahead is well anchored at 3.0%

On activity, the BCCh has been cutting its GDP growth forecast for 2026, mainly due to the underperformance of sectors linked to natural resources. The BCCh estimates that the economy is currently working under a negative output gap, but it has characterized it as a slightly negative gap, so for now it is not considered a relevant source of deflationary pressure. Minutes for the Jun 16 meeting did mention some initial evidence of private consumption and investment weakness, but MPC members speculated that the private consumption weakness would be reversed if gasoline prices decline, and noted that investment prospects are looking strong.

Monetary policy moving forward

Since the economy works under a negative output gap and the external price shock is expected to be transitory, the consensus is that inflation will return to where it was before the shock, right at the 3.0% monetary policy target, as the shock fades over the next 12 months. This is important for monetary policy. The MPC's 3.0% inflation target is evaluated within a two-year period, so if the effects of the external shock are seen fading within this period and expected inflation two years ahead remains anchored at 3.0%, it is hard to see any immediate pressure for the MPC to hike in the short term. Of course, the story would change if the conflict in the Middle East worsens or we see another inflationary shock.

A cut appears unlikely while inflation sits above the 3.0% target, but oil prices returning to pre-March levels could accelerate the inflation convergence to Q4 or Q1 next year. The case for an earlier cut would form if the economy continues to disappoint compared to expectations, especially if it starts to show more weakness in private consumption and investment. Basically, if the negative output gap widens in a more significant way and conditions at the Strait of Hormuz continue to normalize, there could be a preemptive cut on account of medium-term deflationary pressure.

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• Next board meeting: Sep 30, 2026
• Current policy rate: 12.00%
• EmergingMarketWatch forecast: 100bps hike

BanRep would need to raise its benchmark rate on Sep 30 if the inflation outlook worsens. At the Jul 31 policy meeting, Governor Leonardo Villar said CPI inflation would converge to the 3.0% target only slowly and that expectations remain far from that goal.

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The surprise was one vote breaking the tie between a 50bps hike, which markets expected, and leaving the rate unchanged at 12.0%, which prevailed. Based on the minutes and prior remarks, the most likely deciding vote was Olga Acosta, appointed by President Petro, who had backed the hawkish bloc since 2025 and helped preserve what we described as a fragile majority. Minutes, due on Wed. evening, will shed light on that view.

We still do not know the monetary policy stance of incoming Finance Minister Miguel Gómez. He and the president-elect, Abelardo de la Espriella, have pledged to respect central bank independence but also want lower rates. At the same time, any administration faces heightened political pressure in its first months, so securing legislative majorities for approving key reforms is a must. Currently, exporters are under strain from a COP that has gained nearly 20% this year and more than 2% against the USD in a single session on Jul 30 amid a still wide Fed-BanRep rate differential. Thus, an incoming administration supporting rate hikes might create unwanted noise that could increase the current polarization in the country's political scene. Therefore, we do not expect de la Espriella or Gómez to openly support a restrictive monetary policy.

BanRep remains hard to predict, and the Jul 31 decision, like the unanimous hold at 11.25% on Apr 30 after a dispute with the finance minister, suggests a board whose revealed behavior does not always match the technical, independent posture it says it maintains. Having said that, Villar said at Friday's press conference that the central bank's technical team now expects inflation to end 2026 at 6.9%, up from 6.4%, with the new forecast due in the monetary policy report released this evening. The bank still expects inflation to remain elevated in H2 2026 due to indexation, labor costs, and higher regulated prices. It also sees risks tilted to the upside from a possible strong or very strong El Niño, further fuel and regulated-price adjustments, Middle East tensions affecting commodity prices, and lingering labor-cost effects.

On CPI inflation expectations, the 12-month ex ante real rate stands at 6.51% using the policy rate of 12% and market expectations of CPI inflation at 5.49% from the July economic expectations survey. Using one-year breakeven inflation rates, derived from the spread between nominal and inflation-linked bond yields, the real rate is 5.1%, implying inflation expectations are nearly 138bps higher than the survey. Still, both metrics are far from the central bank's 3.0% target. While Villar framed this as slow convergence, the gap between survey and market-implied expectations points to a sharper problem: a deterioration in confidence in the inflation target itself.

In its latest report to Congress, the Board said the policy rate will be adjusted to anchor expectations and bring inflation back to target if inflation continues to deviate from 3%, or if more persistent inflation and "undesirable" sources of indexation emerge. The most prominent example is this year's 23% minimum wage increase, which took effect in January and has fed into CPI through lagged service and rental-price adjustments. The Board added that this approach works better and at a lower cost when monetary credibility is preserved through timely decisions.

In essence, that is the front-loading approach Villar and Mauricio Villamizar have both publicly defended: a sharp move now to avoid a larger correction later. Given that three members backed a 50bps hike on Jul 30, the board does not meet again until Sep 30, and inflation should stay sticky, the most likely outcome is a 100bps hike to 13%, aimed at breaking the inflation trend in the next monetary policy meeting. That view still depends on the July inflation print, due Aug 10, and on the board dynamics. It is still unclear whether the swing voter will hold their position or what stance Minister Gómez will take, further complicating an already challenging space for forecasting monetary policy.

• Current policy rate: 3.50%
• Next monetary policy meeting: Sep 1, 2026
• Expected decision: Hold, 25bps cut possible

The MPC cut the policy rate by another 25bps to 3.50% on Jul 6 with the latest research department forecast suggesting two more cuts in the next year so that the policy rate would reach 3.50% in Q2 2027. There are no clear indications when the next cuts would be made and we think that the decisions would be very data-dependent. The fragile calm in the region and inflation developments should play the major role, we think. BoI governor Amir Yaron repeated after the decision that the monetary easing might be faster and more expansive if inflation expectations continue to decline towards the lower end of the 1-3% target range. He added though that in case of deterioration, the MPC would change the course. Latest data on inflation expectations show an increase at the middle of July but they are still below the mid-point of the 1-3% target range, at 1.9%. In addition, the risks for another flare-up with Iran increased and the shekel appreciation ceased with the local currency reversing some of the gains. Thus, if the situation does not change materially, we think that the possibility for another rate cut in September has likely diminished.

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The MPC looked more confident during the last rate decision that inflation was not a threat since it underlined risks in both directions while previously it was stressing only factors that can accelerate inflation. This did prove true in June when inflation eased to 1.6% y/y after remaining stable at 1.9% y/y in Mar-May and most of the components were with disinflationary impact. It even fell below 1% if excluding the heavyweight-housing component. Inflation has been benefitting from the strong shekel until now but this effect would start fading at some point in view of the NIS depreciation lately. The US-Iran tensions are likely to keep world oil prices high and the rising wages might also have an impact through a surge in demand. On the other hand, if the calm is maintained, the easing in supply-side constraints should continue to have a moderating impact on inflation. The research department has cut the inflation forecast to 1.8% y/y in Q4 2026 and the factors that can affect inflation in either direction are the geopolitical developments and their effects on economic activity and on energy prices, the risk premium and the exchange rate, the development of demand alongside supply constraints, and fiscal developments. Yaron warned that if the government does agree eventually to add NIS 25bn more to the defence budget, in line with the demands of the defence establishment, this can boost inflation by 0.3pps in the next year.

GDP declined by 3.8% in saar terms (seasonally-adjusted annualised rate) in Q1, still lower than the economic contraction in Q2 2025 when the previous war with Iran took place despite the 0.5pps downward revision in the second estimate. The BoI says that growth was supported by the activity of multinational companies, which was outside the country's borders but for the purposes of the national accounts was included in Israel's GDP. However, with the easing of supply constraints, the growth base would expand. Media reported though that BoI seniors are reportedly estimating a lower potential growth now due to a decline in productivity because of the long period of reserve service and have transmitted a rather hawkish message when they met with major forecasters. For now, high-frequency indicators point to a recovery in Q2, with credit card purchases exceeding their long-term trend line, exports increased faster than imports and services exports strong, according to the BoI. There is no credit crunch either so activity is not likely to be among the major considerations yet, in our opinion.

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: 16.75%
• Next monetary policy meeting: Sep 4
• Expected decision: hold
  

On Jul 24 the NBK cut the base rate by 25bps (to 16.75%), following the 100bps cut implemented in June. While the current decision does not come as a complete shock, it is still surprising in the context of recent market developments. The NBK's own press release acknowledged inflationary tendencies. The deceleration of CPI inflation was highlighted as a decisive factor, though we note that it was rather mild. In June, the CPI rate edged down to 10.3% y/y, as opposed to 10.4% y/y in May. More importantly, monthly price growth and core inflation exceeded the outcomes that supported June's rate cut. Households' inflation expectations were elevated as well.

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As a whole, these factors do not point to consistent disinflationary tendencies, which the NBK had outlined as a prerequisite for a full-scale easing cycle. Nevertheless, the bank insisted its inflation management strategy and exchange rate dynamics supported a rate cut. This is despite concerns regarding several inflationary factors, including tensions in the Middle East, higher inflation in Russia, and rising global food prices. Domestically, the bank sees risks related to fuel prices, utility tariffs, inflation expectations, and potential demand-side pressures. At the same time, it indicated agreements with the government regarding fiscal spending, signalling that the latter is limited to critical projects and will thus ease inflationary pressures.

All in all, we think July's decision implies the NBK is looking to extend the monetary easing cycle further in the year. Formally, the bank has said there is no predetermined base rate trajectory, even noting that an easing halt or a full-scale 'change in course' would be possible in case of inflation shocks. At the same time, NBK governor Suleimenov stated the base rate could ultimately drop to 16% if inflation moderates to around 9-9.5% by the end of 2026. In this context, we would not be surprised to see another rate cut in September, but at this point we have put forward an on-hold baseline scenario due to the long monitoring period before the Sep 4 meeting.

• Next policy meeting: July 16
• Current policy stance: 2.50%
• Last decision: May 28 (Hold)
• Forecast: 25bps hike to 2.75%
• Rationale: Inflation above 3%, Iran war re-escalation, much improved growth outlook, weak KRW/USD exchange rate

The Bank of Korea (BOK) is very likely, for the first time in three years, to raise its policy rate by 25bps to 2.75% at the July 16 meeting, in our view. The outlook has not changed significantly from our last report, with public statements by BOK officials continuing to be clearly hawkish and indicative of an interest rate hike. The upcoming hike was clearly signalled by BOK Governor Shin Hyun-song during his latest report at the National Assembly on July 9. Shin said that "it is necessary to raise the base interest rate at an appropriate time" given the fact that inflation is exceeding target levels and the GDP growth outlook continues to be revised upwards. He also mentioned financial stability risks as a consideration.

We would say that this upcoming hike was telegraphed already during the last policy meeting at the end of May. We remind that two members dissented and called for a hike already back then, even though the BOK decision was to keep the base rate unchanged at 2.5%. The consensus among local Korean analysts also points to a hike, with many saying that a 25bps increase has already been effectively priced in by financial markets. If the BOK does not raise rates now, it could undermine its credibility, in our view, especially given Governor Shin's statements in parliament last week. The more interesting question is what the BOK will communicate in terms of outlook.

Inflationary risks remain heavily tilted to the upside

In our view, the central bank will most likely maintain a clear hawkish stance and continue signalling at least one more rate hike in H2. This is due to several factors. First, the inflation outlook remains elevated. The OECD projects 2.6% average CPI inflation in 2026 and 2.2% in 2027, while the Asian Development Bank projects 2.7% and 2.2%, respectively. The latest CPI reading for June came in at a relatively high 3.16% y/y, with core inflation at around 2.5% y/y. In addition, the housing market remains hot, with apartment price growth staying quite elevated at around 0.3% w/w in Seoul.

At the end of June, it was assumed that external inflationary factors have subsided, but with the Iran war flaring up again, oil prices have now increased by over 20% since the start of the month. It appears that, looking forward, the working assumption should be that the Middle East conflict could end up being an on-and-off-again situation for an indeterminate period, which naturally raises inflation expectations significantly. The government is already seeking to adapt to a more uncertain trade environment in this regard, by drafting a targeted strategy to make Korea more resilient to trade disruptions. We note that we would have expected the BOK to raise rates now and maintain a hawkish stance until end-2026 even if the Iran war had not flared up again.

Growth outlook keeps improving amid chronically weak KRW

Meanwhile, the near-term outlook for GDP growth has significantly improved thanks to the semiconductor supercycle and record surge in exports that South Korea has achieved thanks to it. This surge in exports is, in turn, being channelled into greater investment, both at the public and the private level. Recently, some market analysts, primarily overseas, have suggested that the semiconductor cycle may be peaking, but, notably, the BOK explicitly rebuked this. In a written response to a lawmaker, the central bank said that the chip market remains in a supply-constrained expansion and the upcycle still has considerable room to run.

Financial instability concerns are also pressuring the BOK in a hawkish direction, given that the KRW remains historically weak against the USD this year and the local stock market is having an extremely volatile year so far. The fact that the KRW is so weak against the USD even as Korea's exports are surging and the CA surplus significantly widening is another factor pushing the central bank to hike rates, in our view. Local officials keep saying that the rising external balance should eventually translate into a stronger KRW, but the longer this does not happen, the more questions will be raised whether the ongoing FX weakness might be partly due to the significant differential between the base rates maintained by the Federal Reserve and the Bank of Korea.

Conclusion

In our view, all relevant factors push the Bank of Korea towards tighter monetary policy in H2 2026. Inflationary pressures remain elevated, especially with the re-escalation of the Middle East conflict, while the growth outlook continues to improve thanks to surging exports. We think the tighter monetary policy will most likely start materialising already in the July 16 meeting, with our baseline projection being a 25bps hike, with another 25bps hike to be signalled for later in H2, either in August or early Q4. Overall, the BOK seems likely to maintain the outlook it set out at the end of May. If the central bank were to modify the outlook in any way, we think it would only be in an even more hawkish direction.

Useful Links

Monetary Policy Decisions

Minutes

Monetary Policy Board composition

Open Market Operations

• Next policy meeting: Sep 3, 2026
• Current policy rate: 2.75%
• Our forecast: Hold
• Last decision: Hold (July 9, 2026)
• Rationale: July meeting gave no signs BNM sees need for change amid solid growth and subdued inflation
  

Bank Negara Malaysia (BNM) is unlikely to change its monetary policy stance in the last two meetings of 2026, in September and November, as Malaysia's subdued inflation and solid growth figures allow it to remain on hold, in our view. The central bank kept its Overnight Policy Rate at 2.75% in its meeting on July 9, keeping the policy rate unchanged for one full year after its last policy change - a cut by 25bps in July 2025. In addition, there were no signs that the BNM plans any changes to its monetary policy stance after it reaffirmed that the monetary policy stance remains "appropriate and consistent with the outlook of continued price stability and sustainable economic growth."

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With regard to inflation, the BNM said that the impact of higher global commodity prices on inflation is expected to remain "contained," with inflation in the first 5 months of the year staying broadly within expectations. In addition, the BNM reaffirmed that its growth projection for 2026 remains firmly within the forecast range of 4-5%, subject to both upside and downside risks such as prolonged conflict in the Middle East, stronger demand for E&E goods, or higher tourism activity.

Looking at recent economic data, industrial production remained buoyant and grew by 8.4% y/y in May led by the mining and the E&E sectors. Moreover, wholesale and retail sales surged by 11.0% y/y in May in value terms and by 3.1% y/y in volume terms, as consumer demand remained a consistent growth driver. At the same time, CPI inflation stood at 2.0% y/y in May, up only slightly from 1.4% y/y in February 2026.

Overall, the government's generous fuel subsidy programme remains the key measure keeping a lid on inflation which enables the BNM to maintain an unchanged monetary policy stance for longer. We think that BNM will hold throughout 2026 and will slightly tighten policy with a 25bps rate hike in early 2027, if the current growth and inflation trajectory remains unchanged. Factors to monitor in the remainder of 2026 are the degree to which inflation will accelerate due to second-round effects stemming from the increase in oil prices and supply disruptions, and whether demand-pull inflation will cause the economy to start overheating amid the tightening labour market.

Further Readings

Previous OPR decisions

• Next MPC meeting: Aug 10, 2026
• Current policy rate: 6.50%
• EmergingMarketWatch forecast: Hold

Rationale: Romania's central bank is very likely to maintain the key policy rate at 6.50% in the Aug 10 MPC meeting and wait at least until the end of the year before considering a cut, in our view. We base this assumption on persistently high inflation, driven by rising fuel prices following the Iran conflict and a renewed spike in domestic uncertainty after the political crisis. The NBR also revised its end-year inflation forecast to 5.5% from 3.9% in its latest Inflation Report, reflecting a stronger-than-expected impact from fuel prices linked to the Middle East conflict and a more moderate contribution from adjusted CORE2 inflation. As for rate hikes, such moves were previously ruled out by a central bank representative.

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The central bank kept the policy rate unchanged, reflecting a sharp deterioration in the short-term inflation outlook following the escalation of the Middle East conflict and the resulting surge in global energy prices. According to the NBR, the balance of risks has shifted decisively upward, with inflation expected to rise through June, reaching levels higher than previously anticipated due to fuels and elevated oil and gas prices.

Headline inflation eased to 10.42% in June from 10.85% y/y in May, marginally below expectations. The central bank projected a temporary acceleration until June, driven primarily by imported energy costs. This marked a notable shift from previous projections, which pointed to a gradual disinflation path supported by base effects and administrative measures.

Governor Mugur Isarescu earlier stated that monetary easing was not appropriate in the short term, stressing that the central bank's priority remains inflation control and policy credibility. He warned that a prolonged conflict in the Middle East could have severe consequences for the Romanian economy. Market expectations have adjusted, with some economists no longer anticipating cuts in 2026 and others seeing room for easing only toward year‑end. Given the revised inflation path and the NBR's hawkish tone, we now expect the first rate cut in late Q4, unless renewed shocks in energy markets reignite inflationary pressure.

• Current policy rate: 14.25%
• Next monetary policy committee meeting: Jul 24
• Expected decision:hold

The market is now pricing Friday's rate decision as a pause, although there are still views in favour of both a rate hike and a rate cut. These differences reflect not only the assessment of current data, but also different expectations for future trends. While some key macroeconomic indicators, such as budget execution and slower economic growth, suggest there is room for a rate cut, others, especially inflation, inflation expectations and lending dynamics, argue for at least maintaining the current level of monetary tightening. At the same time, the outlook remains uncertain. Budget performance depends on global oil prices, while developments in the war in Ukraine also affect inflation through fuel price shocks. We expect the CBR to keep the key rate unchanged at 14.25% at this meeting, although we do not rule out a 25bp cut to 14.00%.

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Inflation accelerated sharply to 10.6% (SAAR) in June from 2.5% and 2.0% in April and May, respectively. The three-month average reached 5.0% (SAAR). However, we believe almost all of this acceleration was caused by the fuel factor. Therefore, the CBR's main task is to understand how significant and persistent the secondary effects of the fuel crisis will be. It is unlikely to have enough information to make this assessment before Friday's meeting. For example, weekly inflation data for July still do not confirm a quick return to lower price growth. At the same time, we believe the CBR does not yet see broad-based secondary effects on inflation.

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Expectations are deteriorating on both the demand and supply sides. The BCI fell sharply to -3.6, reflecting a significant weakening in business sentiment. At the same time, inflation expectations of businesses increased to 20.2%, the highest level since January, while household inflation expectations rose sharply to 14.7% in July, the highest level since December 2021. However, it is still unclear whether this deterioration will become persistent because the surveys were conducted during the peak of the gasoline crisis. This is another argument in favour of waiting before changing the policy rate.

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The budget position is improving. June recorded a surplus and solid growth in non-oil&gas revenues. However, the medium-term outlook of the FinMin suggests that lower baseline oil prices will lead to a primary budget deficit this year and in the following years. At the same time, future government spending cannot be forecast with confidence because it depends on developments in the war in Ukraine. Another area of uncertainty is FinMin's suspension of OFZ auctions. We recall that the auctions were halted for an indefinite period earlier this week. This is not a major problem while the budget remains close to balance, but there are no grounds to assume such a situation will last for a long time. The last time the authorities suspended OFZ auctions was at the beginning of the war in 2022, when the pause lasted for several months. If this uncertainty continues, it could create risks for financing future budget spending this year.

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After a temporary improvement in March and April, when economic growth reached 1.8% and 1.3%, respectively, activity slowed again to 0.3% in May. We expect another slowdown in Q3 because of weaker fiscal support, unstable external conditions, geopolitical tensions, the fuel crisis and other negative factors. Apart from fiscal spending, growth is still supported by relatively resilient domestic consumer demand, which is itself closely linked to the fiscal impulse. The labour market is also gradually cooling, although this is not yet reflected in the official unemployment rate. At the same time, based on recent years' experience, rising inflation expectations could trigger stronger consumer spending rather than higher household savings.

External risks also remain elevated, although the CBR has given them relatively little attention at recent meetings. The main risks now include renewed escalation in the Middle East after the recent pause and rising tensions on the Ukrainian front amid reports that President Putin may take a tougher position on possible concessions.

Next MPC announcement: Jul 23, 2026

Current policy rate: 7.00%

EmergingMarketWatch forecast: 7.25%

We expect the MPC to raise the policy rate by another 25bps to 7.25% on Thursday (Jul 23), extending the tightening that began in May. Although the hold option would also likely be on the table, the latest inflation data have strengthened the case for action. The MPC is unlikely to disregard the risk that the recent inflation shock becomes more persistent.

Headline inflation accelerated to a two-year high of 5.0% y/y in June from 4.5% in May and 3.1% in March. The outcome exceeded the 4.7% market consensus, while prices increased by 0.7% m/m for a second consecutive month. Transport inflation was the main driver, reaching 12.7% y/y as fuel prices rose 34.3% y/y. Housing and utility costs increased by 5.5% y/y, while food inflation was comparatively subdued at 1.6% y/y.

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The concentration of the initial shock in fuel prices gives the MPC some reason to expect inflation to moderate. However, the June data also point to broader pressure beneath the headline number. Core inflation increased to 4.1% y/y from 3.8% y/y and rose by a relatively strong 0.6% m/m, exceeding the market forecast of 3.9% y/y. This reduces the comfort that the acceleration can be treated as a purely temporary energy shock. Producer inflation, which rose to 7.8% y/y in May, also points to potential cost pass-through as businesses absorb higher transport and production expenses.

Lower fuel prices should produce a visible moderation in July, but the relief may be neither complete nor lasting. We estimate that July's fuel-price reductions could subtract about 0.5pps from headline inflation. At the same time, the roughly 9% increase in municipal electricity tariffs could add around 0.3pps, offsetting much of that benefit. Renewed oil-price pressures have also reduced the expected inflation relief from fuel in August to only about 0.1ppt. Inflation may therefore peak later or decline more slowly than previously anticipated.

The May MPC statement already noted that rising inflation had made monetary policy less restrictive than in March. June's upside surprise has reduced the real policy rate further, despite the 25bps increase delivered in May. A second increase would restore some of that lost restrictiveness and provide insurance against fuel and electricity costs spreading into wages, services and other consumer prices.

Expectations are already moving in the wrong direction, according to the BER's Q2 survey which showed expectations rising across all major horizons, including to 4.1% over five years, while household expectations increased to 6.0%. Retail sales, industrial production and business surveys point to subdued Q2 activity, giving the MPC a clear reason to proceed cautiously. Nevertheless, the combination of a higher-than-expected headline print, firmer core inflation, deteriorating expectations and continuing energy price uncertainty is likely to outweigh the weak growth backdrop. A 25bps hike would signal that the SARB intends to prevent the shock from becoming embedded and remains committed to returning inflation sustainably to its 3% target.

Monetary Policy Committee Statement

Monetary Policy Committee Forecasts and Assumptions

Monetary Policy Review

• Next policy meeting: Sep 30
• Key rate: 8.75%
• Previous decision: Hold (Jul 22)
• Our forecast: Hold
• Rationale: With inflation above target but the May tightening still transmitting through the economy, the CBSL is likely to maintain rates while monitoring external pressures and domestic credit conditions.

The Central Bank of Sri Lanka (CBSL) kept the Overnight Policy Rate unchanged at 8.75% on Jul 22, following the larger-than-expected 100bps increase delivered in May. The decision was broadly in line with our forecast and reflected the Monetary Policy Board's preference to allow the earlier tightening to transmit through the economy before considering further action.

The policy backdrop has nevertheless become more complex. Headline inflation has moved further above the CBSL's 5% target, while renewed tensions in the Middle East have again increased uncertainty around global energy prices, trade routes and Sri Lanka's external position. The central bank also noted that, although the recent inflation increase was largely supply-driven, stronger demand and credit conditions could amplify price pressures if left unchecked. The July decision therefore represents a cautious pause rather than the end of the tightening cycle. The CBSL expects the May rate increase, together with measures to curb import demand, to moderate private-sector credit growth and reduce demand-side pressures over the coming months. We expect the central bank to maintain this wait-and-assess stance at its next meeting on Sep 30, provided inflation expectations remain anchored and external-sector conditions do not deteriorate materially.

Inflation Outlook

Inflation continued to accelerate in June. Colombo inflation rose to 6.8% y/y from 5.5% in May, while national inflation increased to 6.5% y/y from 5.4%. The monthly increases were also sizeable, with the Colombo Consumer Price Index rising 2.1% and the National Consumer Price Index increasing 1.6%. Price pressures have broadened across food, energy and transport. Non-food inflation remains the larger concern.

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The CBSL expects headline inflation to remain above the 5% target in the near term before gradually declining, while core inflation is also forecast to rise towards the target. Its July projections remain subject to unusually high uncertainty, with upside risks from renewed geopolitical escalation, higher shipping and fertiliser costs, further LKR depreciation and possible El Niño-related disruptions to agriculture and hydropower generation.

Although medium-term expectations remain broadly anchored, the combination of above-target inflation, strengthening domestic demand and renewed energy-price risks argues against an early reversal of the May rate increase.

External and Financial Conditions

The external position remained under pressure in May, with the current account recording a USD 194mn deficit for a second consecutive month. This brought the cumulative current-account deficit to USD 97mn during January-May, compared with a surplus during much of the previous year. The merchandise trade deficit widened to USD 4.7bn during the first five months of 2026, from USD 2.7bn a year earlier, as imports continued to outpace exports. Fuel import expenditure rose 112% y/y to USD 536mn in May, while cumulative motor-vehicle imports reached USD 1.07bn. The deterioration in the terms of trade further underlined the economy's exposure to higher global commodity prices.

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Tourism provided less support than expected. Tourist arrivals increased 9.6% y/y in May, but earnings declined 5.1% to USD 156mn, while cumulative tourism receipts fell 11.9% y/y to USD 1.36bn during January-May. The broader services surplus contracted 36.8% y/y during the month. Meanwhile, workers' remittances remained the principal external buffer, rising to USD 847mn in May and reaching USD 3.9bn during the first five months, up 26% y/y. Gross official reserves stood at USD 6.9bn at end-May, supported by IMF disbursements, before easing to USD 6.45bn at end-June amid external debt-service payments. Both figures include the People's Bank of China swap facility.

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The LKR depreciated 7.9% against the USD during the first half of 2026, although the CBSL reported some stabilisation in recent weeks following tighter monetary and import-management measures. External pressures have therefore eased from their peak but remain material. The current-account deficit, weaker tourism receipts and exposure to fuel imports will remain key constraints on monetary-policy flexibility.

Growth Momentum

Economic activity remained resilient in early 2026, with real GDP expanding 5.1% y/y in Q1, up from 4.8% in Q4 2025. Industry was the main driver, growing 7.2%, supported by construction, mining and manufacturing, while services expanded 3.4%. The strength of the recovery has reduced the immediate growth cost of tighter policy. However, the impact of the May rate increase is likely to become more visible during the second half of the year as lending rates adjust, credit growth moderates and import restrictions weigh on vehicle sales and other interest-sensitive activity.

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The CBSL's assessment that demand conditions have strengthened also suggests that growth is no longer the overriding policy concern. With inflation above target and the external account again in deficit, policymakers are likely to prioritise macroeconomic stability over near-term acceleration in activity.

Conclusion

The July decision confirmed that the CBSL's 100bps increase in May was intended as a front-loaded tightening measure rather than the beginning of a rapid sequence of rate hikes. By holding the OPR at 8.75%, the central bank signalled that it intends to evaluate the impact of tighter financial conditions before adjusting policy again. We expect the CBSL to keep the OPR unchanged at 8.75% on Sep 30. However, the policy bias remains tilted towards further tightening rather than easing. Another increase would become more likely if renewed Middle East tensions trigger a sustained rise in fuel prices, the LKR comes under renewed pressure or credit and import demand fail to moderate.

Further Reading

Latest MPC Meeting

MPC Calendar

IMF Country Report, May 2026

• Next MPC meeting: Aug 26
• Current policy rate: 1.00%
• EmergingMarketWatch forecast: Hold
• Rationale: CPI for June; comments by Governor Vitai; new forecasts by IMF, ADB, finance ministry

We think that BOT's Monetary Policy Committee (MPC) will keep the policy interest rate unchanged at 1.00% in its meeting on Aug 26, the fourth one for 2026. On Jun 24, the MPC voted unanimously (7-0) to maintain the key rate at 1.00%. The decision was in line with expectations. After the MPC meeting, BOT Governor Vitai Ratanakorn said that there was no need to hike rates for now.

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The June CPI inflation was lower than expectations and remained within the 1-3% target range. The latest CPI data were released on Jul 6. On Jul 11, Vitai said that inflation will likely be below the central bank's forecast of 2.8% for 2026 and will decrease further in 2027.

According to him, cutting the key rate further would not be easy given that the current level is very low already.

In July, new economic forecasts were released by the IMF, the ADB and Thailand's finance ministry. They see this year's GDP growth at 1.9%, 1.8% and 2.5% respectively. The ministry's forecast is the most recent one and is only slightly below Thailand's long-term growth potential of 2.7% as reported by Vitai.

All in all, we do not see a compelling argument for changing the policy interest rate at the MPC meeting on Aug 26.

Economic growth

The IMF predicts GDP growth in Thailand of 1.9% in 2026 and 2.2% in 2027, according to the World Economic Outlook Update released in July. In April, the IMF forecast the two growth rates at 1.5% and 2.1%, respectively. The IMF said that the projected growth for this year reflects emergency fiscal measures and further benefits from strong technology-related exports and investment. Thailand's economy expanded by 2.4% in 2025.

The Asian Development Bank (ADB) forecasts that Thailand's GDP will rise by 1.8% in 2026 and 2.0% in 2027, the ADB said in the July edition of its Asian Development Outlook. Both rates are unchanged from April.

Last week, the finance ministry said that it forecasts economic growth of 2.5% in Thailand in 2026, up from a previous projection of 1.6%. This year's growth is seen as benefiting from government stimulus measures. The ministry now expects export growth of 12.5% this year, up from 6.2% predicted in April.

Inflation

The headline CPI increased by 2.42% y/y in June, slowing down from 2.79% y/y growth in May. The June inflation was estimated at 2.70% y/y by Bloomberg poll of 15 economists, whereas the forecast of a Reuters poll was 2.79% y/y. The CPI increased by 1.08% y/y in H1.

The PPI increased by 7.2% y/y in June, decelerating from 8.5% y/y in May. The index fell by 1.5% m/m in June, after dropping by 1.3% m/m in May. The PPI increased by 4.7% y/y in H1. The deceleration of annual PPI inflation in June was driven by manufacturing.

The ADB raised its forecast of inflation in Thailand in 2026 to 2.9% from 1.3% in April. Next year's inflation forecast was revised up to 1.3% from 1.0%.

Exchange rate

The exchange rate of the Thai baht is USD/THB 33.479 at the time of writing, which compares with USD/THB 33.705 on Jun 24, the date of the latest MPC meeting. The exchange rate was USD/THB 31.500 on Dec 31, 2025.

Earlier in July, Vitai said that the baht was moving broadly in line with other currencies in the region, the Bangkok Post reported. The weaker baht benefits the export and tourism sectors, he added. Yet, the governor reportedly warned that a protracted conflict in the Middle East could increase inflation expectations and affect Thailand's economic growth outlook.

Further reading

MPC decision of Jun 24

Schedule of MPC meetings

Edited minutes of MPC meetings

Monetary policy report

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

We expect that the central bank (NBU) will leave its key policy rate (discount rate) unchanged at 15.0% again tomorrow. Most bankers surveyed by Interfax-Ukraine also predicted another on-hold decision. The NBU made on-hold decisions in March, April and on Jun 18. The NBU made it clear earlier that a new easing cycle, in spite of some disinflation, will not be resumed this year, and there have been no indications that this stance has changed.

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Headline CPI inflation in June eased for the second month in a row, to 7.2% y/y. However, core inflation accelerated further to 8.1%. In its inflation commentary on Jul 10, the NBU said that while headline inflation was in line with projections in June, core inflation came in above projections again, on the back of growing production and service costs and increasing wages. Raw food prices continued to fall, down 0.2% y/y, thanks to growing supply. But growth in administered prices accelerated to 10.7% y/y on the back of increased water supply tariffs. The NBU forecast that price pressures would keep rising.

Eight MPC members out of 11 supported another on-hold decision at the Jun 17 meeting. There was no more unanimity, unlike in previous MPC meetings, minutes published on Jun 29 indicate. Three MPC members advocated for raising the rate by 50bps to 15.5%, arguing that inflation continued to stay above forecasts. Views of MPC members on the future path also diverged. Seven of them argued in favour of maintaining the current stance, but four predicted that the NBU would have to raise the rate to 15.5%-16.0% over the coming months.