• BCRA to raise quickly next time CPI inflation comes at 7.0% m/m or close
• BCRA needs to keep monthly effective rate and crawling peg closely in step with inflation to reduce export delay and portfolio dollarization incentives
• Unsustainable deficit+debt dynamics keep BCRA from pursuing positive real rates or depreciation
• BCRA can only passively respond to rising inflation, this status quo likely remains until regime change

The BCRA's future monetary policy rate decisions will remain bounded by the evolution of effective inflation, expected inflation for the short-term, and the interest rate limitations the central bank faces if it is to keep the official real exchange rate steady in the coming year, which is something the bank is paying close attention to. The BCRA hiked its benchmark 28-day bill rate by 300bps to 78.0% in mid-March to accommodate the monthly effective rate at 6.5%, up from 6.3%, in what was the first move for the rate since last September. The decision was taken following the release of a surprisingly high 6.6% m/m CPI inflation print for February and with market expectations of a similar reading for March. The BCRA is likely to raise another 200bps or 300bps if the CPI reading for March is close 7.0% m/m, unless high-frequency price trackers show a deceleration in early April.

Monetary policy has been passive for most of the past three years, sitting under the weight of massive fiscal dominance and past policy mistakes, and there are no prospects for this to change until the end of this government in December. To put it in short, the BCRA needs to keep its monthly effective benchmark rate and the official exchange rate crawling peg moving right in step with CPI inflation, and it doesn't have room to deviate much or for too long, which means monetary policy should be fairly predictable this year. The BCRA has slightly more room to delay rate cuts if inflation declines than it has room to delay rate hikes if inflation rises, but it seems very unlikely that inflation will decline this year anyway.

The dangerous inflation spiral and the massive real exchange rate appreciation that took place in 2021-22 put pressure on the BCRA to raise nominal interest rates and push the pace on the crawling peg when inflation rises. If the crawling peg lags versus inflation, the government would be increasing the incentives for exporters to withhold sales abroad and wait for an inevitable devaluation, while also reducing competitiveness (most exporters are forced to convert their FX income into local currency). This would add to an FX market crisis that has the government burning through its low FX reserves. However, if the nominal crawling peg is to move faster, interest rates also need to rise in step to avoid creating incentives to delay exports. Interest rates that at least match inflation are also key to discourage portfolio dollarization through parallel exchange rates, which are an increasingly important benchmark for price-setting practices.

The BCRA also needs to be careful of not going too high with real rates because it would contribute to the explosiveness of public debt dynamics and inflation. With the government running a fiscal deficit of more than 4.0% of GDP every year despite having virtually no access to market financing, the deficit has been covered by a mix of inflation tax and central bank balance sheet deterioration. The higher the real interest rate goes, the faster the deterioration of the central bank's balance sheet and the growth of the federal government's short-term debt. However, the evolution of market financing for the government and the BCRA's remunerated liabilities suggests that the room to get financing through these avenues is pretty much closed now, which only leaves inflation tax as an option. In this scenario, nominal interest rate hikes are inflationary as long as there are no drivers to increase the private sector's willingness to finance the government.

• MPC meeting: Mar 17-18, 2026
• Current policy rate: 15.00%
• EmergingMarketWatch forecast: 50-bp cut (to 14.50%)

The improved near-term outlook highlighted by the Copom in its latest minutes is set to support the start of the monetary easing cycle at the next policy sitting on Mar 17-18, which we expect to begin with a 50-bp cut. Looking at the Copom's risk balance, upside and downside inflation risks remain numerically balanced, but upside risks appear to have diminished in recent months. Upside risks include persistently de-anchored inflation expectations, stronger-than-expected services inflation due to a wider output gap, and inflationary pressures from both external and domestic sources, such as sustained exchange rate depreciation. Meanwhile, downside risks include a sharper-than-expected domestic slowdown and potential disinflationary effects, a less inflationary global environment amid trade disruptions, heightened uncertainty, and falling commodity prices.

Although long-term inflation expectations remain de-anchored -- reinforcing the need to maintain a restrictive monetary stance even as cuts begin -- expectations for 2026 have been gradually declining, according to the Focus Report. Moreover, the Copom has already noted that services inflation has cooled, and the exchange rate remains well behaved, having appreciated steadily in recent months. In our view, this backdrop should allow for an initial 50-bp Selic cut in March.

Recent data also confirm the effectiveness of monetary tightening and the positive effects of currency appreciation, such as PPI deflation of -4.53% in 2025, with PPI remaining in negative territory for 11 consecutive months. A record harvest in Brazil in 2025 also contributed to producer price deflation and a faster easing of inflation last year, which fell below the 4.50% upper limit of the +/- 1.50 pp tolerance band around the 3.00% target faster than expected.

Although we expect a 50-bp cut in March, domestic economic resilience could argue for a more modest 25-bp move. Economic activity fell 0.18% m/m in December 2025, missing the consensus expectation for a 0.50% decline and underscoring resilience. On a quarterly basis, activity grew 0.40% q/q in Q4 after a 0.90% contraction in Q3, while annual growth slowed to 2.50% in 2025 from 3.80% in 2024, reflecting the impact of the BCB's tightening cycle. However, the economic activity breakdown showed that services posted their first monthly decline since July, supporting the BCB's view that services inflation is easing and potentially leaving room for a larger cut. Meanwhile, industry remains resilient despite firms reporting tight monetary policy as a constraint and industrial confidence remaining negative.

Overall, following the Copom's indication that it will begin the easing cycle in March, the key question now is the magnitude of the first cut. The Copom stated that the size and pace of easing will be decided on an ongoing basis. In our view, the benign inflation backdrop and controlled economic slowdown allow for a 50-bp cut in March, though we do not rule out a 25-bp move if incoming data show more resilient inflation and activity. Even as cuts begin, the monetary environment should remain restrictive while policymakers seek to re-anchor long-term inflation expectations and reduce the costs of disinflation.

• Next MPC meeting: Mar 19, 2026
• Current policy rate: 3.50%
• EmergingMarketWatch forecast: hold

Rationale: The CNB board expectedly left interest rates unchanged at its latest MPC meeting in February, and it sent signals this will remain the case for a while. The language of the post-meeting statement did not differ much from the one in December. While it was confirmed that the board discussed some fine-tuning of monetary policy, the minutes from the meeting clarified that they were debating about only a 25bp cut for the year, not anything beyond that. Furthermore, the board was confirmed to have been looking at core inflation and service prices most of all, and these are expected to remain elevated in H1 2026 at least, if not longer.

The majority of the board is still wary of domestic inflation pressure, coming mostly from structural changes, a tight labour market in the service sector, and risks related to fiscal policy. Thus, while some board members would not mind slightly lower interest rates, everyone appears to be ruling out a rate cut in the near future, at least as long as core inflation and service price growth remain sticky. Thus, headline inflation easing below the 2% target in January has not impacted the CNB board's stance, especially after this has been entirely due to volatile prices or one-off effects coming from government actions. The latter mostly applies to the removal of the renewable energy surcharge, which pushed down energy prices. However, the effect will expire at the beginning of 2027, and the ETS2 is still about to be introduced in 2028, whose impact on headline inflation will be +0.4pps.

Furthermore, domestic economic conditions are now even more pro-inflationary, as the latest CNB forecast envisages GDP growth at 2.9% in 2026, driven mostly by household consumption. With that in mind, the only reason for headline inflation to be below the target is external factors, and it remains uncertain how long these will be in effect. Moreover, the CNB projects a noticeable fiscal expansion as soon as in 2026, which is too much for the more hawkish board members, like Eva Zamrazilova.

As a result, we are not surprised that the CNB board remains cautious, as CNB governor Michl emphasised on more than one occasion that the goal was to maintain price stability in the medium term, not react to short-term developments. CNB deputy governor Frait added that the board would move to some monetary easing when it sees a sustainable deceleration in core inflation and service prices, and these will likely remain sticky in the first half of the year. At this point, we have lowered our expectations for a maximum of a single 25bp rate cut in 2026, and possibly none if core and service price inflation remains high.

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Further Reading:

CNB board statement from latest MPC meeting, Feb 5, 2026

Post-meeting press conference, Feb 5, 2026 (in Czech)

Q&A after the latest MPC meeting, Feb 5, 2026

Minutes from the latest MPC meeting, Feb 5, 2026

Monetary Policy Report, February 2026

Macroeconomic forecast, February 2026

Meeting with analysts, Feb 6, 2026

CNB board profile

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

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

• Next MPC meeting: April 2, 2026
• Current policy rate: 19.5%
• EmergingMarketWatch forecast: 19.5% - 18.5%

The MPC will hold a policy rate meeting in early April, and we might see a pause in the current easing cycle should the FX rate pressures intensify. The pound has weakened slightly over the past week, which we attribute to the growing regional insecurity, external debt payments during February, and increased food imports during Ramadan. On the other hand, disbursements from the IMF (expected at around USD 2.3bn) and proceeds from the divestment program should shore up the local currency and restore confidence in the economic and fiscal reform program of the government.

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More generally, CPI inflation is expected to moderate further this year, getting closer to the CBE's target of 7% +/-2pps by end-2026, supported by the stronger pound, softer commodity prices, and favourable base effects that will counter the inflationary impact of strong money supply growth. The MPC has delivered a cumulative rate cut of 825bps since April, bringing the main interest rate to 19.5%, and analysts project further 500-700bps reduction this year because the real interest rate remains elevated. GDP expanded robustly in 2024/25 as non-oil manufacturing rebounded and private consumption and investments improved further, but economic growth is nearing its full potential, so some demand-side inflationary pressures are likely to resurface this year.

Monetary Policy Committee Statement

Monetary Policy Review

Monetary Policy Committee Meeting Schedule

• Next MPC meeting: Feb 24, 2026
• Current policy rate: 6.50%
• EmergingMarketWatch forecast: Hold
• Rationale: December CPI structure not conducive for rate easing, part of MPC still in favour of cuts as long as inflation is in line with expectations

The monetary policy entered a new phase as of December as the MPC held the policy rate at 6.50% but revised the policy guidance in the direction of rate cuts. The previous guidance had been firm that no rate cuts were expected in the foreseeable future, while the current guidance loosened this stance and indicated that rate decisions will be taken on a month-by-month basis. This clearly opened the door to rate cuts, while the other change in the policy guidance indicated that the prospective rate cuts will be decided on an ad-hoc basis depending on the incoming data. Financial market stability and inflation developments will be the key indicators, which will shape monetary policy decisions, the MPC indicated. Pricing behaviour in the beginning of January will be key for the assessment of the inflation outlook, the MPC has said. The policy guidance remained unchanged after the MPC rate meeting in January.

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The unchanged policy guidance meant that a policy rate cut of 25bps could be still on the agenda for February, we think. The likelihood for policy loosening in February has declined though due to the unfavourable December CPI print, we assess. NBH governor Mihaly Varga had said before the CPI data release that the NBH will mostly monitor services inflation and will want to see higher pass-through from the forint appreciation to tradable prices, while the December CPI disappointed on both counts. The CPI moderated to 3.3% y/y in December, which Varga qualified positively as it was the second month with inflation within the tolerance range but admitted that it exceeded the NBH expectations. Services inflation actually picked up on telecom and tourism services prices during the month, while durables goods prices did not indicate significant change in monthly repricings, in our opinion suggesting no further pass-through from the recent forint strengthening. In subsequent statement, NBH deputy governor Zoltan Kurali also signalled reduced chances for policy easing, saying on Jan 14 that the NBH needed to see more convincing disinflation before proceeding with rate cuts. We expect that inflation could fall further in January on the back of continued downside trend in food prices and base effects on fuel prices due to the six-month delay in the implementation of the excise tax hike. That said, we expect limited improvement in the core inflation metrics due to sticky services prices, elevated inflation expectations and healthy consumption demand, so we consider the odds to be against a rate cut in February. Nevertheless, several MPC members argued that simple disinflation will open room for rate cuts because of the rising real interest rate, according to the January meeting minutes. They seemingly voiced preference for rate cuts as long as inflation was in line with the NBH expectations and irrespective of the particular structure, we believe.

Monetary policy will be based on a cautious and patient approach due to persistent risks for the inflationary outlook, the MPC said on its January meeting. It will continue to target a positive real interest rate for the sake of safeguarding financial market stability and for the sake of anchoring inflation expectations towards the 3.0% mid-term inflation target. Household inflation expectations have stagnated in the past months and have remained at levels inconsistent with price stability, according to the MPC assessment. The stability of the forint exchange rate will be therefore important for the sake of helping the elevated inflation expectations to cool down in line with the inflation target, the MPC said. We see it unlikely that January could produce a simultaneous disinflation and material downward correction in household inflation expectations, which reinforces our expectation that incoming data should prove insufficiently positive to support a rate cut already in February.

Post-meeting MPC statement from January rate-setting meeting

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

Minutes from January MPC rate meeting

Inflation Report - Q4/2025

MPC meeting calendar 2026

• Next MPC Meeting: 6-8 April 2026
• Current Policy Rate: 5.25%
• Last Policy Action: Hold (February 2026)
• Our Base Case: Hold (No Change)

The Reserve Bank of India is expected to approach its April policy meeting with a narrowing case for further easing. The MPC's February hold, following three consecutive cuts totalling 100bps, signalled that the central bank has reached an inflection point. With inflation prints slowly edging higher, growth holding above trend, and external vulnerabilities intensifying through rupee weakness and capital outflows, the incremental benefit from an additional rate cut has diminished materially. In our assessment, the RBI is likely to extend the pause, using the interval to evaluate transmission efficacy and safeguard policy optionality against an uncertain external backdrop.

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Inflation Dynamics

India's disinflation phase is showing signs of exhaustion. CPI inflation accelerated to 1.3% y/y in December 2025, up from 0.7% in November, marking the highest print in three months. The uptick was driven primarily by personal care and effects and particularly jewellery prices responding to rallying global gold markets.

More consequential for policy is the RBI's own revised trajectory. At the February meeting, the MPC lifted its FY26 inflation forecast to 2.1% from 2.0%, while projecting a steady ascent through the near term: 3.2% in Q4 FY26, 4.0% in Q1 FY27, and 4.2% in Q2 FY27. This upward glide path implies inflation will converge toward the 4% target by mid-year and remain anchored within the tolerance band, but it also narrows the window for pre-emptive easing. Governor Sanjay Malhotra noted that the growth-inflation trade-off remains "finely balanced," a formulation that suggests little urgency to ease further when inflation is firming rather than receding.

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Economic Growth

India's growth momentum remains resilient, supported by domestic demand and public capital expenditure. The RBI upgraded its real GDP growth projection for FY26 to 7.4% from 7.3% at the February meeting, with quarterly growth now estimated at 6.9% in Q1 FY27 and 7.0% in Q2 FY27. This reflects confidence that activity will moderate only marginally from recent highs, rather than slip below potential.

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High-frequency indicators corroborate this view. India's automobile retail market began 2026 on a strong footing, with sales rising 17.6% y/y in January to 2.72mn units, according to the Federation of Automobile Dealers Associations (FADA). Momentum was broad-based across passenger vehicles, two-wheelers, commercial vehicles and tractors, supported by resilient rural demand and post-GST policy tailwinds. The services sector regained traction in January, with the HSBC India Services PMI Business Activity Index rising to 58.5 from 58.0 in December, a two-month high. The pickup followed some loss of momentum toward end-2025 and reflects renewed demand buoyancy, stronger new business inflows, and continued technology investment. Manufacturing activity also recovered, with the HSBC India Manufacturing PMI climbing to 55.4 in January from a two-year low of 55.0 in December, signalling faster growth in new orders, output, employment and input buying. Notably, cost pressures edged higher, but pricing power on the output side remained subdued, pointing to demand-led recovery rather than inflation-driven expansion.

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Governor Malhotra highlighted improving corporate performance, high capacity utilisation and supportive financial conditions as factors that should sustain manufacturing and investment activity. Public-sector capex and anticipated spillovers from recently concluded trade agreements are expected to provide further support. This is not a growth environment that requires monetary backstopping. The expansion remains above trend, domestic demand indicators are firm, and corporate fundamentals are improving. The case for easing on growth grounds is structurally weak.

External and Financial Vulnerabilities

India's external position has deteriorated, introducing fresh constraints on policy flexibility. The rupee slid to a fresh record low of 91.95 against the US dollar in late January, extending a depreciation trend that has seen the currency fall more than 2% in January alone and roughly 5% over 2025. The recent weakness reflects sustained dollar demand from importers, particularly bullion buyers, alongside speculative positioning by offshore players and continued foreign portfolio outflows. Capital flows remain a structural vulnerability. Foreign investors have withdrawn roughly USD 3.5bn from Indian equities in January, dragging the Nifty 50 down nearly 5%. Portfolio equity outflows reached a record USD 18.9bn in 2025, while inflows through external commercial borrowings have remained subdued.

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India's trade performance showed mixed signals in December. Merchandise exports rose 1.8% y/y to USD 38.51bn, even as global trade conditions remained volatile. Imports, however, expanded 8.8% y/y to USD 63.55bn, pushing the merchandise trade deficit to USD 25bn, up 21.4% y/y and wider than November's USD 24.53bn. This reflects strong inbound demand and elevated non-oil, non-gold imports. While the current account deficit narrowed to 1.3% of GDP (USD 12.3bn) in Q2 FY26 from 2.2% (USD 20.8bn) a year earlier, led by services exports and remittances, and FX reserves remain elevated at USD 690bn (~11 months of import cover), the rupee's trajectory and capital outflow pressures complicate the easing calculus. Further rate cuts risk amplifying portfolio exit flows and currency depreciation.

Governor Malhotra flagged geopolitical frictions and fragile global bond market sentiment as external risks. The recent easing of US tariffs on Indian exports, with Washington lowering the reciprocal tariff on most Indian goods to 18% from 25% following a bilateral deal with Prime Minister Narendra Modi, is a credit-positive development, particularly for labour-intensive industries such as gems and jewellery, textiles and apparel. Moody's Ratings noted the tariff cut should help revive momentum in India's goods exports to the US, which accounts for roughly 21% of total merchandise exports. However, this near-term relief does not eliminate broader external vulnerabilities stemming from capital flow volatility and currency pressure.

Outlook

The RBI delivered 100 basis points of easing between February and June 2025, taking the repo rate from 6.5% to 5.25%. Since then, it has held twice, in December and February, signalling that the cutting cycle has concluded for now. At the February meeting, the standing deposit facility (SDF) was maintained at 5%, while the marginal standing facility (MSF) rate and bank rate were held at 5.50%. The neutral stance was retained, underscoring a wait-and-watch posture.

Transmission of prior cuts is still playing out. System liquidity remains ample following earlier CRR reductions, and overnight funding rates continue to track the lower bound of the policy corridor. Corporate lending rates have adjusted, though pass-through to retail segments remains incomplete. The MPC is likely to prioritise observing how transmitted easing feeds through to credit growth and private investment before contemplating further action. The policy message in February was one of cautious confidence: growth remains robust, inflation is manageable, but the room for further rate cuts is limited. That calculus is not likely to change materially heading into April. Our base view is that the MPC will hold the repo rate unchanged at 5.25% in April. Any further easing would require either a tangible growth miss, which current indicators do not support, or inflation remaining anchored between 1-1.5% for longer than currently projected, which the RBI's own revised forecasts rule out.

Further reading

Last MPC decision

RBI Forward Looking Surveys

• Next policy meeting: Mar 16-17
• Current policy rate: 4.75%
• Our forecast: Hold
• Last decision: Hold (Feb 18-19)
• Rationale: Rupiah depreciation to force BI to remain on hold in March

Bank Indonesia has kept the key rate on hold for the last five meetings, after surprising markets three times in H2 2024 with rate cuts. The central bank says it remains dovish and looking to support GDP growth, though the pressure on the rupiah has forced it to keep the key rate flat.

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Instead, the central bank has now focused on improving the transmission of monetary policy into loan interest rates, so that bank lending gains pace. However, the accelerating inflation and the depreciating rupiah will likely weigh on further rate cuts in March, in our view, particularly given that the rupiah is approaching the psychological threshold of USD/IDR 17,000.

We should note that CPI Inflation slightly exceeded the central bank's 2.5+/-1% target band, as it rose to 3.55% y/y in January, though this is mainly on the back of a base effect from the electricity tariff discounts in Jan-Feb 2025. Core inflation remains firmly anchored to the central bank's target.

As a result, we think BI will resume monetary easing once the rupiah stabilises, possibly in April or May.

GDP growth

GDP growth accelerated to 5.39% y/y in Q4 from 5.04% y/y in Q3. Investment and private consumption were the main factors behind the stronger growth, while government spending also contributed. The BI has maintained its GDP growth forecast at 4.9-5.7%, remaining on the optimistic side.

We should note that the government will continue to boost public spending H1 2026 to support GDP growth, extending further the trend that started in H2 2025. The measures include speeding up the free lunch programme (MBG), as well as rolling over the placement of IDR 200tn government funds from the surplus budget balance (previously kept with the central bank) into commercial banks in a bid to boost lending.

Exchange rate stability

The rupiah has depreciated by about 1% against the USD since the beginning of the year, extending the downward trend after it lost 1.8% in 2025. The rupiah now trades in the USD/IDR 16,800-16,900 range, edging close to the psychological threshold of USD/IDR 17,000.

The BI governor stated that Bank Indonesia will continue to use its tools to keep the local currency stable. In fact, the BI regularly intervenes in the forex market through its so-called triple intervention, which includes purchases on the spot FX market, domestic non-deliverable forwards (DNDF) and buying government bonds on the secondary market.

We should note that BI's aggressive rate cuts in 2025 were also partly influenced by the Fed Funds rate cuts as well. Looking forward, the outlook now is for a much more stable environment with the Fed likely to cut by 50bps cumulatively in 2026.

Inflation environment

CPI inflation accelerated to 3.55% y/y in January from 2.92% y/y in December, breaching the upper end of the BI's 2.5+/-1% target band. This is large due to the base effect from the electricity tariff cuts for low-income households in Jan-Feb 2025. As a result, the central bank views the elevated headline inflation as temporary and expects it to return to its target band in March.

On the other hand, core inflation remains well within the BI's target band. The central bank expressed confidence that CPI inflation will remain under control and within the target band in 2026. This projection looks realistic, in our view, though we will have a clearer picture in March.

Conclusion

Looking forward, we expect Bank Indonesia to keep the key rate on hold in March and focus on the rupiah's stability. However, should the Fed take the lead and slash the Fed Funds rate first, this could take away some of the depreciation pressure on the rupiah, and we may see a surprising rate cut sooner than anticipated.

On the other hand, we should note that BI has been largely surprising markets in 2025, with half of the rate cuts coming against consensus forecasts for a hold decision. However, we believe this is not the case now, given the renewed pressure against the local currency.

Further reading

Last MPC press release

Calendar of MPC meetings

• Next MPC meeting: March 26
• Current policy rate: 7.00%
• EmergingMarketWatch forecast: 25bps cut

CPI inflation slowed to 3.92% y/y in February H1, up by 0.26pps so far in the year, on the back of fruit and vegetables' prices. This acceleration was, to a point, expected, considering the own CB has recognized inflationary pressures early in the year from the government's tax hike on sugary drinks and tobacco, and tariff hike on goods coming from countries without a trade deal. Indeed, the food, beverages and tobacco component, which is likely to show much of the anticipated pressure, accelerated to 6.28% y/y in Feb H1, up by 0.95pps so far in 2026.

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Despite this inflationary pressure, we expect the CB will not drop its dovish discourse, anticipating a rate cut in the next few sittings. Indeed, we continue to expect Banxico to cut its Monetary Policy Rate (MPR) by 25bps in March, although the market consensus is for the cut to come until May. On the timing, we note the CB says it will resume its easing cycle once it observes there are no 2nd order effects from the price shocks described above. This does suggest the cuts might come later than we predict; however, we note the latest sitting minute was very dovish, with several board members pondering a rate cut earlier than anticipated.

Indeed, the minute shows a Monetary Policy Council (MPC) unconcerned with poor mid-term CPI inflation projections, in our view, and predicted the impact on prices of the tariff and tax adjustments by the Claudia Sheinbaum administration will be transitory. In this context, a member said the cycle's pause might be shorter than expected, and two board members suggested there might be conditions for a cut in March, per our read of the minute. One more favored monetary easing ahead but gave little clue about the timing. With this, we see a clear 3-majority formed to back a rate cut in March, although this might change if CPI inflation disappoints in February and March H1, delaying the cut until May.

Besides the minute's read, we base our expectation of a rate cut coming next month on comments by CB Deputy Governor Jonathan Heath, who claimed in a podcast that the CB's February forward guidance was meant to anticipate a rate cut in March, so long as CPI inflation stood on the expected trajectory.

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This was a surprising comment, considering lingering CPI inflation pressure; however, the comment only comes to show how little the bulk of the board minds that core CPI inflation remains high. Indeed, core inflation did slow in Feb H1, but held at 4.52% y/y, showing general inflation is in no path to converge to the CB's 3.00% target. Indeed, this makes the recent acceleration of fruit and vegetables' prices more concerning, considering further acceleration of non-core inflation might swiftly push general inflation above the CB's tolerance band.

Whether the CB does cut its MPR in March or it waits to resume its cycle until Q2; the main question looking at the 2026 monetary policy is whether the dovish board will be willing to cut its policy rate by more than 50bps, in our view. The consensus remains for the CB to cut its MPR by only 50bps this year, avoiding any cuts in 2027; however, this assumes a responsible board, unwilling to put the policy rate on expansive territory amid lingering inflationary pressures. Indeed, we believe this cannot be taken for granted, considering the board has been constantly willing to cut its policy rate even as mid-term CPI inflation expectations are only loosely anchored, and lingering inflation pressures all but assure CPI inflation will not be falling to its punctual target anytime soon. We believe any easing beyond 50bps would significantly hurt the CB's credibility, showing away it's not truly committed on having CPI inflation slow to the CB's 3.00% target.

Overall, we expect the CB will cut its policy rate by 25bps in March, despite accelerating CPI inflation in February H1; the decision might end up depending on the pace of inflation recorded in February and March H1. Even if the CB were to hold, we'd expect a rate cut in May. We expect another 25bps cut later in the year, perhaps in Q2 or Q3, ending the easing cycle. However, we are not confident 2026 easing will not exceed 50bps, given the dovish position of the bulk of the board; we believe this will become clearer until mid-2026, when we expect the CB to begin to address the terminal rate.

• Next MPC meeting: 23 - 24 February
• Current policy rate: 27%
• EmergingMarketWatch forecast: 26.5%

The first MPC meetings of the year will take place on February 23 and 24. This session will clarify if recent economic data supports continued restraint or the start of an easing cycle. At the November meeting, the MPC kept the benchmark rate at 27% to consolidate progress on inflation and exchange rate stability. Governor Olayemi Cardoso said policymakers wanted more time for earlier decisions to take effect, despite pressure to reduce borrowing costs. The committee adjusted the interest rate corridor to discourage banks from parking excess funds at the central bank and instead encourage lending to businesses. Analysts say this shift should support credit to the private sector and sustain the disinflation path, with some of these analysts expecting the MPC to remain cautious for now. While the CBN's approach will continue to prioritise price stability over aggressive rate cuts, we anticipate a 50bps rate cut given the disinflation trend. The majority (six members) of the MPC voted for a rate hold in November, but five members supported a 50bps cut amid strong external buffers and continued disinflation. Given that conditions have continued to improve, we expect most committee members to support a cut in February.

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CPI inflation moderated to 15.1% y/y in January, representing the tenth consecutive month of slowing inflation. Food inflation slowed to 8.9% y/y (the lowest level in a decade), compared to 27.6% y/y in January 2025. However, core inflation remains quite elevated at 17.2%. Looking ahead, various forecasts indicate that headline inflation will average 14-16% in 2026. We also expect continued stability and a downward trend in inflation during 2026. The CBN expects headline inflation to ease to 12.94% this year due to falling food prices and lower costs of petrol, according to the bank's 2026 Macroeconomic Outlook.

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Governor Cardoso has repeatedly linked the stability and reforms in the naira to the country's ongoing disinflation process. According to recent analysis by Stanbic IBTC Asset Management, the CBN spent about USD 7.8bn in 2025 to manage foreign exchange liquidity and stabilise the naira. Nearly half of the interventions took place during a period of sharp exchange rate volatility between March and May, when the bank intensified dollar sales to calm markets and reinforce confidence in the liberalised FX system. These actions helped narrow exchange rate gaps and improve overall market sentiment, contributing to a build-up in external buffers. Nigeria's external reserves have risen to USD 48bn as of Feb 16, the highest level since 2018.

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Looking ahead, although inflation is slowing, MPC members warn of risks from seasonal spending and election-related fiscal pressures. Historical patterns during election cycles in Nigeria often amplify these pressures, including FX demand spikes from political activities and potential capital flow reversals amid policy uncertainty. This might force the CBN to maintain a tighter stance longer than anticipated to safeguard reserves and the naira's stability. On the whole, we expect the MPC to enter 2026 balancing cautious monetary easing with a continued focus on price and exchange rate stability.

Monetary Policy Committee Statement

Monetary Policy Committee Meeting Schedule

• Next policy meeting: Mar 9, 2026
• Current policy rate: 10.50%
• Last decision: Hold (Jan 26, 2026)
• Our forecast: Hold
• Rationale: SBP is expected to stand pat throughout 2026 to ensure sustainable growth, preserve external sector stability and, chiefly, to keep real interest rates 'adequately positive' to anchor inflation within target range

The State Bank of Pakistan (SBP) kept its policy rate unchanged at 10.50% on Jan 26, surprising the market, which had widely expected a 50bp cut. The primary factor underpinning the decision, in our view, was an improved growth outlook, as the central bank projected the economy to expand at a faster-than-expected pace in FY26. The SBP also cited concerns over sticky core inflation as well as rising imports, which could put pressure on the external sector. Nevertheless, projections for inflation and current account were maintained for the ongoing fiscal year, suggesting that near-term macro risks remain manageable.

A recurring theme in recent policy decisions has been the SBP's emphasis on keeping the real policy rate "adequately positive", likely on a 12-month forward-looking basis. With headline inflation expected to edge higher in the coming months, potentially reaching 8%-10% in the near term based on IMF projections, the SBP appeared comfortable with the current restrictive monetary policy stance to stabilise inflation within the 5%-7% target range.

The SBP highlighted that it was prudent to keep the policy rate unchanged to support sustainable economic growth. The emphasis on "sustainable" is key, as the central bank aims to avoid overheating the economy through further monetary easing, which could generate excess demand, fuel inflation, and ultimately jeopardise the recent hard-won macroeconomic stability. Thus, the rate hold signals a strong commitment toward maintaining price stability and ensuring durable growth.

Against this backdrop, we revert to our earlier stance that the December 50bp surprise rate cut was a one-off move and the SBP is unlikely to adjust its policy rate in either direction throughout 2026. The decision to cut cash reserve requirements by 100bps does not, in our view, signal a dovish tilt.

Inflation environment

CPI inflation in December eased to a three-month low of 5.6% y/y, down from 6.1% y/y in November, due to softer gains in the food and transport prices. On the other hand, core inflation remained relatively elevated at 6.9% in urban centres and 8.2% in rural areas, partly reflecting the impact of earlier upward adjustment in gas tariffs and higher jewellery prices amid a rally in the global gold market.

That said, the SBP maintained its benign inflation outlook, noting that CPI is likely to stabilise within the target range of 5%-7% in FY26 and FY27, after temporarily exceeding the upper bound for a few months during the current calendar year. This assessment is supported by the government's recent decision to keep gas and electricity prices unchanged, along with subdued global commodity prices, a stable exchange rate, and ample food supply amid expectations of a bumper wheat harvest.

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GDP growth

The SBP turned more optimistic on GDP growth, upgrading its forecast by 0.5pps to a range of 3.75%-4.75%. This outlook is bolstered by sustained domestic demand, aided in part by lower borrowing costs and improved farm output, especially wheat. The central bank noted that economic activity has picked up sharply, as reflected in strong readings of private consumption and investment-related indicators, including auto sales, cement dispatches, refined fuel sales, and imports of machinery and intermediate goods.

GDP growth came in at a solid 3.7% y/y in Q1 (Jul-Sep) of FY26, and the SBP noted that this momentum likely continued into Q2. The central bank's full-year growth forecast is quite upbeat than the IMF's and World Bank's projections of 3.2% and 3.0%, respectively.

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External sector

The current account in H1 (Jul-Dec) of FY26 posted a USD 1.2bn deficit, swinging from a surplus of USD 957mn in the same period last year. This deterioration was driven by a sharp increase in imports and a fall in exports, primarily due to a plunge in rice shipments amid increased competition from India. Nevertheless, the deficit remains relatively contained, as the widening trade gap is offset by robust workers' remittances, low global commodity prices, and strong IT exports. The SBP kept its projection for current account deficit unchanged at 0-1% of GDP for FY26.

A favourable current account position (together with loan inflows, including IMF disbursements) has enabled the SBP to build up its foreign exchange reserves through interbank purchases, which, according to SBP governor Jameel Ahmad, totalled USD 22bn over the past three years. The reserves are projected to trend higher, reaching USD 18.0bn by June from USD 16.1bn as of Jan 16. Stronger forex reserves have significantly improved Pakistan's capacity to meet its external obligations.

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Further Readings

Previous policy rate decisions

SBP's The State of Pakistan's Economy report

Latest IMF staff report

• Next monetary policy meeting: Apr 23
• Current policy rate: 4.25%
• EmergingMarketWatch forecast: Hold or cut by 25bps
• Rationale: MB statement of Feb 19; new MB projections of GDP growth, inflation; comments by Governor Remolona

We think that a hold decision and a 25bp policy rate reduction are both possible at the next meeting of BSP's Monetary Board (MB) on Apr 23, the second one for 2026. Last week, the MB cut the key rate by 25bps to 4.25%. The decision was in line with expectations. It followed a 25bp reduction in December. Back then, the MB said that it saw the easing cycle nearing its end. There was no such language in the statement for the February MB meeting.

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After the latest MB meeting, BSP Governor Eli Remolona Jr. said that the outlook for further rate cuts depends on the speed of the recovery of investor confidence. If that happens in a few months, as the central bank expects, there will be no need for further monetary easing. He also said that growth and confidence affect each other and perhaps they could do something with respect to growth.

The main argument in favour of continued easing is the weak economic growth outlook. The central bank has lowered its projection of 2026 GDP growth to 4.6% from 5.4% expected previously. The BSP now expects the GDP to rise by 5.9% next year, also a downward revision. The DBCC targets real GDP growth of 5.0-6.0% in 2026 and 5.5-6.5% in 2027.

The BSP has revised its inflation projection for 2026 to 3.6% from 3.2% previously. According to the central bank, the inflation outlook remains "manageable." However, we think that 3.6% is perhaps too near the upper end of the 2-4% inflation target range to be considered comfortable.

The MB said it will remain vigilant and guided by incoming information, particularly with respect to inflation. The central bank will ensure that overall policy settings continue to be in line with its objective of price stability consistent with sustainable growth and employment.

Inflation

Last week, the MB said that the outlook for inflation continues to be manageable. Forecasts for this year have been revised upward slightly, largely because of supply‑side pressures, which are probably temporary. Nonetheless, inflation expectations remain well anchored, and inflation is projected to move near the 3% target by 2027. The BSP has revised its inflation projection for 2026 to 3.6% from 3.2% previously. The forecast for 2027 has been raised to 3.2% from 3.0%.

CPI inflation accelerated to 2.0% y/y in January from 1.8% y/y in December. The CPI growth had been below the target band over the 10-month period Mar 2025 - Dec 2025. The latest reading is an 11-month high. Annual core inflation was 2.8% in January, speeding up from 2.4% in December.

Economic growth

The MB said that economic growth has fallen short of the central bank's expectations because of weaker domestic demand. While the latest indicators suggest there will be a recovery in H2, growth will depend primarily on the speed of the recovery of confidence. The central bank has lowered its projection of 2026 GDP growth to 4.6% from 5.4% expected previously. The BSP now expects the GDP to rise by 5.9% next year, also a downward revision. The latest projection for 2026 is below the administration's target of 5.0-6.0%.

The GDP increased by 3.0% y/y in Q4, decelerating from 3.9% y/y growth in Q3. The latest reading is the weakest growth since Q1 2021, when GDP fell by 3.8% y/y. The Philippine economy expanded by 4.4% in 2025, decelerating from 5.7% growth in 2024.

Last year's economic growth outcome was below the most pessimistic estimate, which had been made by the BSP. The central bank expected economic expansion by 4.6% in 2025, whereas the Development Budget Coordination Committee (DBCC) predicted full-year growth by 4.8-5%.

Exchange rate

The peso is trading at USD/PHP 57.551 at the time of writing, which compares with USD/PHP 58.012 on Feb 19, the date of the latest MB meeting. The Philippine currency has strengthened from USD/PHP 59.466 on Jan 15. The peso appreciation provides some room for the BSP to further cut the policy interest rate, in our view.

Further reading

Press release after Dec 2025 monetary policy action

Schedule of monetary policy meetings

Highlights of MB meetings on monetary policy

Monetary Policy Report

• Next MPC meeting: Mar 3-4, 2026
• Current policy rate: 4.00%
• EmergingMarketWatch forecast: 3.75%

Rationale: The Monetary Policy Council held rates at both its January and February sittings, which was in keeping with its announcement when it brought in December its easing in 2025 to 175bps that it would take a pause to gauge the data and in light of some solid economic data. But CPI inflation is simply lower than expected and is expected to remain low for some time, opening the door to a 25-bp cut at the coming sitting on Mar 3-4 as well as at least 25bps more in the months beyond.

NBP and MPC head Adam Glapinski said at his early February presser that if the March inflation projection update showed nothing alarming and there were no unexpected external events, then the MPC could cut rates at its Mar 3-4 sitting. Glapinski did add, though, that he was in touch with the NBP's experts and analysts and there were no signs the projection would be negative and every sign that inflation would be expected to remain around the central 2.5% target through 2026. Glapinski noted inflation was lower than expected due to lower power tariffs, lower farm commodity prices, goods disinflation, and weaker services price growth.

A whole host of MPC members have since come out with comments that March will likely or very likely see a cut, and we can't imagine the council won't indeed trim rates by 25bps to 3.75%, which will be the lowest rate since March 2022. Members like Przemyslaw Litwiniuk have floated the idea of waiting until the Apr 8-9 sitting to cut due to the fact that the CPI basket won't be updated until mid-March, that is, after next week's sitting, though he also noted the council might then move by 50bps. But we think that the current inflation forecasts are so low that the MPC will cut in March.

MPC member Ireneusz Dabrowski said in an interview published Tues. that inflation would likely be 1.5-2.5% y/y, that is, in the lower band around the 2.5% +/- 1-pp target, for all of 2026 and 2027. Glapinski suggested he sees a similar rate and all MPC comments have said inflation is likely to be low and there are no major threats on the horizon. With the MPC members also saying that they prefer a real rate of around 1-1.5%, inflation of, say, 2% would mean real rates are closer to 2% right now, which is much higher than the preference.

Most MPC members have circled 3.5% in one way or another as the short-term target rate, but there is a lingering question of whether the council might go for more. Though new member Marcin Zarzecki said he only sees room for 25bps in cuts, some have suggested that the council could go lower. In his Tues. comments, Dabrowski said that if forecasts were certain inflation would be in the lower range for a long time, then the council could debate going lower.

As to whether the MPC will go below 3.5%, there is probably a decent chance. The MPC is likely to cut by the 25bps in March and then 25bps more in Q2, bringing the key rate down to 3.5% by end-June. The early July inflation projection update will likely then prove key. If 2028 inflation looks low, then perhaps another 25bps might be cut in H2. But there are many uncertainties, including the ETS2, which is now due to go into effect in 2028. The US foreign policy is a massive unknown, with any attacks globally possibly boosting oil prices and helping undermine the benign inflation outlook. Some MPC members have also said they would want some ammo to cut in the future if they have to, indicating a preference for some not to go too low. In the end, if external risks don't materialise and inflation is set to run below 2.5% through 2028, then the council is likely to cut beyond 3.5%, but whether it will do so remains unsure.

MPC's post-sitting statements

Latest council minutes

Latest NBP inflation report (November 2025)

Most recent MPC voting results

Archived video of all MPC press conferences

• Next MPC meeting: Mar 12, 2026
• Current policy rate: 37.0%
• EmergingMarketWatch forecast: Cut by 100bps
• Rationale: Dovish CBT assumptions, January overshoot, unanchored expectations, and strong money/credit/fiscal growth keep 16% unattainable

We expect the CBT to deliver a gradual easing step at the upcoming MPC meeting, most likely a 100bps cut. The latest inflation report reinforced our view that the CBT remained dovish and still fell short of a realistic assessment of the inflation outlook. By keeping the target unchanged, in our view, the CBT risked widening the credibility gap. Moreover, for instance, the CBT assumed an average global oil price of USD 60 per barrel, an assumption we considered implausible amid an intensifying Middle East risk premium, while Brent recently traded above USD 70 per barrel. The report also leaned on optimistic assumptions around food-price dynamics via climate conditions, as well as contained rental trends and regulatory effects on education prices. Overall, the CBT's stance appeared heavily conditioned on benign external and administrative factors rather than domestically driven inflation persistence. Against this backdrop, we judge accommodation to be premature, given lingering upside risks through 2026 and the still-binding 16% year-end target.

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As we have previously emphasised, reaching 16% by the year-end looked close to unattainable for several reasons. First and foremost, the January inflation print of 4.84% m/m overshot market expectations and warranted close investigation. Global oil prices have been rising amid geopolitical strain, implying renewed upside pressure on February inflation. Similarly, flood-related supply disruptions and Ramadan-linked pricing dynamics were likely to add to the monthly momentum. We therefore expect February inflation to print around 3.0% m/m. If realised, headline inflation would approach 31.6% y/y, interrupting the disinflation trend after a prolonged stretch. More fundamentally, achieving the CBT's 16% year-end target would require an average monthly inflation rate of roughly 0.7% for the remainder of the year, an arithmetically stringent path that we regarded as implausible under current conditions.

These concerns strengthened further when we accounted for the broadly unanchored expectations. In this regard, we note 12-month-ahead inflation expectations stood at 48.8% y/y for households, 32.0% y/y for the real sector, and 22.1% y/y for market participants, each far above the CBT's target, and leaving backward-looking pricing behaviour and indexation dynamics as material risks that could sustain inflation inertia. At the same time, 2026 looks less supportive on base effects, with limited statistical help to mechanically compress the y/y rate, while D-PPI holding in a 25%-27% y/y range over the past 12 months signalled persistent pipeline cost pressures that could prolong pass-through and reinforce stickiness through second-round effects. Adding to that, sizeable under-the-mattress gold holdings likely functioned as a discretionary liquidity buffer that could intermittently fund consumption or investment when monetised, thereby underpinning domestic demand and, at the margin, keeping price pressures firmer than otherwise.

We would also underline three additional demand- and liquidity-side signals: M3 growth at 39.1%, private-sector credit growth at 45.7%, and budget expenditure growth at 54.9% y/y. Taken together, these metrics pointed to still-expansive nominal conditions and limited evidence of a sufficiently tight macro-financial stance. As such, they materially narrowed the feasible disinflation path and made the CBT's 16% year-end inflation target even less attainable without a sharper, more durable slowdown in domestic demand and a clearer improvement in expectations, we caution.

Summary of January rate-setting meeting

MPC rate decision in January

Quarterly Inflation Report for Q1

Monetary policy strategy for 2026

• Next MPC meeting: Mar 24, 2026
• Current policy rate: 4.50%
• EmergingMarketWatch forecast: 4.50%

The BCCh's Monetary Policy Council was widely expected to cut its benchmark interest rate by 25bps to 4.25% in its next meeting, scheduled for Mar 24, but the start of the Iran conflict and its impact on oil prices and the CLP are a significant development that could convince the council to take a pause. Assuming the conflict won't be fully resolved in the next three weeks, we expect the MPC to adopt a wait-and-see approach, and thus change our forecast for the March sitting to a hold.

Domestic conditions as of the end of last week called for a cut, or at least gave ample space for the MPC to move in that direction. Headline CPI inflation finally returned to the 3.0% monetary policy target, and inflation expectations for the next 24 months were well anchored at 3.0%. Economic activity has gone several quarters without showing a significant output gap, and the BCCh's projections did not foresee one opening up. In this context, it seemed natural that the MPC would cut 25bps to 4.25%, which is the midpoint of the 4.00%-4.50% neutral interest rate range consistent with inflation at the 3.0% target.

The Iran conflict could become a game-changer, mainly due to its impact on prices. We understand Chile doesn't import significant amounts of energy from the Middle East, but it is a big net energy importer, so it takes the full hit from a spike in global oil prices in terms of the direct impact on domestic energy prices, and the indirect impact through CLP depreciation. A prolonged period with high oil prices could become a challenge like the electricity price hikes of 2024-25, which derailed the inflation convergence process when it seemed about to be finished.

It is early for a good estimate of the impact the Iran conflict could have on inflation and activity, and we believe the uncertainty in itself pushes the MPC toward wait-and-see. Even if the MPC has reasons to believe that the impact of the conflict will be transitory and limited to oil prices, it can wait until the next sitting in April for the final cut in the cycle. Keeping the monetary policy rate with a "marginally contractionary" bias for one extra month seems reasonable when inflation has been above target for five years and the disinflation process faces real risks of a reversal.

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• Board's meeting: Mar 31, 2026
• Current policy: 10.25%
• EmergingMarketWatch forecast: 75-100bp hike

Rationale: BanRep is expected to deliver another sizable rate increase at its Mar 31 meeting, aiming to re‑anchor inflation expectations toward the 2-4% target range. A 23% minimum wage hike decreed by the government, likely to remain in place despite legal challenges, adds persistent inflationary pressure in labor‑intensive sectors. While fuel subsidies and a stable COP help moderate external cost pressures in the short run, elevated political uncertainty clouds the reliability of baseline forecasts.

We expect BanRep to deliver a 75-100bps hike at its next policy meeting on Mar 31, and we therefore maintain our call for a move in that range. The central bank's latest expectations survey showed that financial sector agents' inflation forecasts moderated slightly in February, after the overshoot recorded in January relative to the December 2025 outlook.

The Council of State provisionally suspended the Dec 30, 2025 decree ordering a 23.2% increase in the minimum wage. Some business leaders and right-wing candidates have publicly opposed rolling back the increase, arguing that it is already an acquired right for workers and that household budgets were built around it. While the press reported more than 30 lawsuits filed with the Council of State seeking annulment of the increase, this shift in stance among actors who had warned about its negative effects underscores the growing political sensitivity of the measure.

With the wage increase still highly likely to remain in effect in practice, and given that the central bank will not meet in February under its usual calendar, we anticipate that the minimum‑wage hike will continue to put upward pressure on prices. This will be especially visible in sectors such as transport, restaurants, and hotels, where many workers earn the minimum wage, in a context where expected monthly inflation for February is around 1.2%. In this vein, the central bank should lean toward a policy rate increase comparable to that applied on Jan 30, between 75 and 100 basis points, seeking to guide inflation expectations back toward the 2-4% target range over 12- and 24-month horizons.

As we have noted, the government's decision to cut COP 500 from the final gasoline price, to keep diesel prices effectively unchanged in February, and an exchange rate fluctuating around COP 3,650 per dollar are contributing mainly to moderating inflationary pressures from external and cost factors. These developments could partially ease the central bank's inflation forecasts. However, elevated political uncertainty around wage policy, fuel pricing, and upcoming court decisions, particularly those with fiscal implications, makes it difficult, for now, to rely on a robust baseline forecast.

• Current policy rate: 4.00%
• Next monetary policy meeting: Mar 30, 2026
• Expected decision: Both hold, 25bps rate cut possible

The market analysts were split on the BoI move on Feb 23 but the MPC eventually decided to hold the policy rate at 4.00%. The press release hinted that the move was due to the increase in geopolitical uncertainties due to tensions with Iran but BoI governor Yaron explained after that in series of interviews with local media that in fact inflation concerns were at the bottom of the decision. Yaron said that other macroeconomic indicators also supported the decision, namely strong economic growth, wage growth, shortages of workers and the renewed rise in rents and apartment prices. He elaborated that the MPC needed to see the effects from the two consecutive cuts and to analyse if they would create excess demand that can accelerate inflation. Yaron confirmed that the economy was at the point the MPC expected it to be ahead of the January rate cut, which he admitted was front-loaded. Thus, the assumption that the policy rate would be at about 3.5% at the end of 2026 in the last research department forecast still holds and Yaron affirmed that the policy rate would not be far from that level. Therefore, we believe that both on-hold and a 25bps cut in the policy rate are possible on Mar 30 from the current perspective, depending on economic and geopolitical developments.

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Inflation moderated to lower-than-expected 1.8% y/y in January, which is already below the middle point of the 1-3% target range. The easing was partially supported by the base effect of the VAT rate hike. Also, it should be taken into consideration the strong impact of the flight ticket prices, which are very volatile, and the positive contribution to inflation of the housing component (rents) in the past two months, which account for more than 27% of the consumer basket. Private demand remained robust in January and Yaron has said that one of the developments to assess when taking rate decisions would be the balance between the rebound of private demand and the closing of supply side shortages, which is a potential risk for inflation acceleration. On the other hand, the shekel has continued strengthening and fundamental factors point that this trend is not very likely to change.

GDP increased by slightly slower-than-expected 4.0% saar terms (seasonally-adjusted annualised rate) in Q4. However, upward revisions in Q1-Q3 resulted into higher-than expected growth of 3.1% in the entire 2025. Credit card spending point to strong private consumption in January and merchandise foreign trade data reveal that exports growth continued in early 2026 and even strengthened. It is likely public spending to be limited in Q1 due to the significant scaling down of the military activities and the stop-gap budget spending. However, the two rate cuts might have led to reassessment of projects and increase in investment. Also, the high-tech capital raising has remained overall strong and the business confidence survey points to positive expectations in most of the sectors. Yaron has stated before that the current policy rate of 4.0% is close to the neutral one, estimated to be at about 3.5% or a little bit more, which is by 1.5% above inflation. He warned though that this might be reassessed.

Board statements, press briefings, minutes from MPC meetings

Calendar of MPC meetings

Latest BoI macroeconomic forecasts

Monetary policy reports

Bank of Israel Law

The Monetary Committee

• Current policy rate: 18%
• Next monetary policy meeting: Mar 6
• Expected decision: hold
  

We expect the NBK to keep the base rate on hold at its Mar 6 meeting. This would be in line with recent inflation dynamics, as well as the current balance of risks. In January, the CPI rate remained broadly stable at 12.2% y/y, but is still elevated as a whole. Monthly price growth dynamics also showed a similar trend despite relative moderation in the food segment. Households' inflation expectations eased to 14.2% (from 14.7%), but the NBK has expressed concern about the persisting share of undecided respondents. In addition, the bank's latest survey demonstrated increasing reports of concern about the tax reform's inflationary impact.

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As a whole, the higher VAT rate is expected to act as an inflationary factor throughout H1 at the very least. Apart from the tax code, other risks are related to quasi-fiscal spending and domestic consumption. We also recall that the government has plans to resume tariff hikes and fuel price reform later this year. Originally, the plan was to lift the current moratorium in Q2. We think there could be a delay if inflation dynamics are deemed to exceed the NBK's forecasts. In general, the return to liberalisation will amplify inflationary pressures, regardless of the exact timing of the reform.

All in all, the central bank is expected to opt for an on-hold decision next month. In a previous comment, it indicated the base rate would likely remain on hold throughout H1 2026. In addition, we believe such a decision would allow the NBK more time to monitor the secondary effect of the VAT hike. Further monetary tightening cannot be excluded this year, but we believe a rate hike would be premature at this stage.

• Next policy meeting: Feb 26
• Current policy stance: 2.50%
• Last decision: Jan 15 (Hold)
• Our forecast: Hold
• Rationale: Base rate likely to stay at 2.5% for protracted period of time
  

The Bank of Korea is likely to stay on hold yet again in its upcoming meeting on February 26 due the high FX market volatility and the surge of real estate prices, especially in the capital Seoul. The BOK has kept its interest rate unchanged since May 2025 and most recently it stayed on hold in its last meeting on Jan 15. However, the central bank left the door open to one last rate cut in its last meeting as 3 out of the 6 board members saw possibility for a rate cut in the next 3 months. Despite BOK's guidance and the Fed's recent dovish moves, we think that the BOK will be hard-pressed to keep rates unchanged in order to prevent further won depreciation and hamper speculative forces in the real estate market.

Thus, we think that the BOK will adopt a neutral stance in the near future and will likely change its guidance to no rate cuts over the next 3 months. The BOK has already removed any mentions of interest rate cuts in the last monetary policy statement. Overall, BOK's language has visibly turned more hawkish over the past 2 meetings, suggesting that a shift in its policy stance has already occurred.

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At the same time, we do not think that the BOK is likely to hike rates in the near future despite a sharp increase in Korean bond yields in recent months. As of now, there have been no signals from the BOK that it is looking to adopt a restrictive policy stance. More likely, we think that the BOK will keep rates unchanged for a protracted period of time. This is also supported by BOK's expectations that inflation will remain around the target 2% throughout 2026.

Meanwhile, BOK raised in November its forecast for 2026 growth to 1.8% - very close to the estimated potential growth rate of 2%. BOK maintained an easing stance throughout 2025 mainly because growth remained below the potential growth rate. With growth expected to return to the potential growth rate, we think that the BOK will have significantly less reasons to consider rate cuts.

GDP weaker than expected in Q4, but exports remain booming in January

It should be noted that the economy posted weaker than expected growth of -0.3% q/q in Q4 amid a persistent softness in facility investment and construction. However, exports remained buoyant as they expanded by 14.9% y/y in the first 20 days of January led by a 70.2% y/y surge in semiconductor exports, according to data from the customs office.

The K-shaped recovery pattern of the Korean economy is becoming more evident as the semiconductor sector is accounting for an increasing share of exports and industrial production, while many other sectors are underperforming. The K-shaped recovery leads to large sectoral disparities and disconnect between how the economy is actually felt and headline growth, according to comments from BOK's governor Rhee from early January. Thus, we think that in normal conditions the BOK could have done one more rate cut in Q1 2026, but due to other factors such as FX volatility and real estate prices, the BOK is forced to stay on hold.

Real estate prices continue to surge in Seoul, while overall inflation has stabilized

Real estate prices in Seoul rose by 0.29% w/w in the week ending Jan 19 (16.3% annualized growth), posting their strongest increase since late October. Real estate prices were underpinned by the resumption of mortgage lending from start-2026 as many banks restricted lending in late 2025 in order to meet lending quotas. In our view, the current level of real estate price growth remains unacceptably high for authorities and there will be more packages to stabilize the real estate market.

Meanwhile, CPI inflation decelerated slightly to 2.3% y/y in December from 2.4% in the preceding 2 months amid easing fresh foods prices. Core inflation stood at 2.0% in December for the second month in a row. The government still expects CPI inflation in 2026 to stay at the same level as in 2025 at 2.1%. The decline in energy prices and won's depreciation remain two offsetting factors that will likely keep inflation stable throughout 2026.

Conclusion

We think that the BOK would have likely cut its base rate one last time in Q1 2026 if not for the continuing surge of real estate prices in Seoul and the looming concerns about FX volatility. Meanwhile, the stability of inflation and the expected economic recovery in 2026, which will bring growth close to potential, also reinforce our expectations that the BOK will not make any moves for the foreseeable future. In the longer-term, we think that the BOK will be likely forced to keep interest rates higher compared to regional peers due to the persistent pressures on the Korean won from outbound investment, which are only going to get exacerbated by the US-Korea trade deal.

Useful Links

Monetary Policy Decisions

Minutes

Monetary Policy Board composition

Open Market Operations

• Next policy meeting: 5 March, 2026
• Current policy rate: 2.75%
• Our forecast: Hold
• Last decision: Hold (Jan 22, 2026)
• Rationale: There is little need to adjust policy rate at this stage, given steady growth and contained inflation

We expect Bank Negara Malaysia's monetary policy committee to keep the overnight policy rate steady at its March 5 meeting, taking comfort from much better-than-expected GDP growth in Q4 2025 and contained inflationary pressures. The central bank forecasts growth momentum to continue this year, supported by resilient domestic demand, higher tourist arrivals, and sustained robust demand for electrical and electronics (E&E) products. Renewed global uncertainty following last week's US Supreme Court ruling against President Trump's reciprocal tariffs is unlikely to materially alter BNM's relatively upbeat global growth assessment. Last month, BNM held the key rate steady for the third consecutive meeting at 2.75%, noting that the current monetary policy stance remained appropriate and supportive of the economy while ensuring price stability.

GDP growth

Malaysia's economy expanded 6.3% y/y in Q4 2025, accelerating from 5.4% y/y in the previous quarter and marking the fastest growth since Q4 2022. The figure exceeded both official and market forecasts. Growth was driven by stronger household spending, amid favourable labour market conditions, and robust investment, supported in part by higher machinery and equipment outlays, particularly for data centres. Exports also strengthened, buoyed by firm overseas demand for semiconductors as well as solid inbound tourism and ICT-related services following the operationalisation of data centres. However, the net external trade contribution was dampened by a sharp rise in imports, mainly intermediate and capital goods, signalling firm manufacturing activity going forward.

On the supply side, growth was driven by stronger factory and services activity, a sustained double-digit expansion in construction sector, and a sharp rebound in agricultural output. The key export-oriented manufacturing sector grew 6.0% y/y, its strongest performance in three years. Full-year GDP growth came in at 5.2%, surpassing the government's forecast range of 4.0%-4.8% and quickening from 5.1% in 2024.

BNM projects growth momentum to continue in 2026. Domestic demand is expected to remain resilient, underpinned by solid private consumption and robust investment activity. A low unemployment rate, which remained at an 11-year low of 2.9% in December, along with wage gains, salary hike for civil servants, and lower borrowing costs are expected to continue supporting household spending. In addition, continued strength in electrical and electronic (E&E) exports and a likely record foreign tourist arrivals following the launch of Visit Malaysia Year 2026 are projected to benefit the external sector.

The government forecasts GDP growth to slow to 4.0%-4.5% in 2026. BNM is set to release its official growth forecast in March, which typically aligns with government's projections.

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Inflation environment

BNM maintains a benign inflation outlook for 2026 after CPI inflation eased to a five-month low of 1.4% in 2025, down from 1.8% in 2024. Easing global cost pressures and the absence of excessive demand are expected to keep both headline and core inflation contained. The central bank continues to view domestic policy reforms, such as the expansion of the Sales and Services Tax and the targeted rationalisation of RON95 fuel subsidies, as having only a mild impact on inflation this year. A stronger ringgit and subdued global food prices are also likely to limit imported inflation.

In January, CPI rose 1.6% y/y, unchanged from December. Core inflation remained elevated at 2.3%, driven by higher sewerage fees, increased costs for education and insurance services, and a notable rise in jewellery prices. BNM is expected to release its official inflation forecasts in March. The government projects inflation to remain within a 1.0%-2.0% range in 2026.

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Exchange rate

BNM refrained from commenting on the ringgit in its previous two monetary policy statements, suggesting the currency's strong performance in recent months prompted it to exclude the exchange rate as a factor in its policy decision. The ringgit has appreciated steadily since early 2024, when it touched a 26-year low against the US dollar. Supported by the narrowing of interest rate differentials with the US and improved domestic economic prospects, it gained 10.2% against the US dollar in 2025 and continues uptrend so far this year, taking USD/MYR to its lowest level since May 2018. The central bank expects resilient domestic fundamentals to continue underpinning the currency, but cautioned that the ringgit will remain subject to external influence. Last month, BNM Governor Abdul Rasheed Ghaffour said that the market, not BNM, determines the level of ringgit, adding that the central bank's role is solely to ensure an orderly forex market.

Conclusion

We expect BNM to keep the OPR unchanged at its upcoming meeting. In fact, the central bank is likely to stand pat throughout this year, considering there appears no immediate need to change monetary policy stance amid steady growth and muted price pressures. This is in line with the Reuters poll, in which a majority of analysts (24 of 28) forecast the central bank to hold its key rate through the rest of 2026. That said, should an external shock emerges, such as tariff on semiconductors that threaten the targeted growth momentum, the central bank has the policy space to deliver a rate cut, especially as inflation remains contained.

Further Readings

Previous OPR decisions

Quarterly Bulletin Q4 2025

• Next MPC meeting: Apr 7, 2026
• Current policy rate: 6.50%
• EmergingMarketWatch forecast: Hold

Rationale: Romania's central bank is very likely to maintain the key policy rate at 6.50% at the MPC meeting on April 7, in our view. Inflation eased only marginally to 9.6% y/y in January 2026 from 9.7% y/y in December 2025, and the NBR expects a further gradual moderation through Q1 before a temporary acceleration in Q2, driven by the expiration of the gas price‑cap scheme, the basic food markup caps, and several commodity price increases. As a result, inflationary pressures are expected to persist until a sharp disinflation phase begins in Q3, when strong statistical effects will take hold.

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Moreover, NBR Governor Mugur Isarescu explicitly ruled out a rate cut in the short term during the press conference presenting the Inflation Report, arguing that a cut was not a good idea so soon and likely not even in May. He reiterated that the central bank's primary mandate is inflation targeting rather than supporting economic recovery, and suggested that as long as inflation remains high, preserving the NBR's credibility for markets was more important.

While we are almost certain that no rate cut will be decided in April, the probability of easing increases in May. Even though inflation will likely remain high in Q2, the temporary acceleration might be avoided because the Inflation Report did not consider the government's decision to replace the gas price‑cap scheme with an administered producer‑price mechanism and basic food markup caps with an automatic mechanism that caps markups when inflation exceeds certain levels. The statistical office is expected to release the April CPI print just before the May 15 MPC meeting, and if it shows credible moderation, we believe a rate cut becomes highly likely. As Isarescu stressed, the monthly inflation trend will be particularly important, given that the annual rate is distorted by various exogenous factors.

Besides, the governor also expressed concerns about weaker‑than‑expected economic performance in 2025, with potential carry‑over effects into 2026, highlighting a sharp weakening of aggregate demand and a deepening negative output gap that he expects to persist due to ongoing fiscal consolidation.

According to the NBR, inflation could enter the target band (2.5% ±1 pp) in Q2 2027, two quarters later than projected in the previous report. A faster absorption of EU funds could offset some of the contractionary effects of fiscal consolidation and help the economy recover.

• Сurrent policy rate: 16.0%
• Next monetary policy committee meeting: Feb 17
• Expected decision: hold

Expectations are split between another cut and a hold decision ahead of the Friday CBR board meeting. The meeting takes place one month after a large number of administrative price hikes and we are skeptical the overcautious CBR will go for an early cut and put the inflation slowdown at risk. At the same time, concerns about a boost to inflation in January and February have not materialized so far, which supports the possibility for a rate cut. Apart from these factors, the key pro-inflationary risks that the CBR regularly highlights remain in place. Economic growth in Q4 significantly exceeded CBR's expectations, while still meeting the annual projection. The government is likely to bring spending forward in Q1, as it did in 2024 and 2025, so an acceleration in price growth is also likely on this basis. Another concern for the CBR is that inflation expectations remain elevated, influencing both households and corporate segments. Overall, CBR rhetoric points toward keeping the rate unchanged in February, given mixed data.

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Inflation surprisingly slowed down in the last week of January to 0.2% w/w, bringing the annual rate to 6.5% in Jan, according to EconMin's preliminary estimate. Undoubtedly, it remained stronger in January than 5.6% y/y in Dec or 6.4% y/y in Nov, but it is still quite a positive outcome after 2pps VAT rate hike and indexation effects. The final figures are not yet available and some categories highly sensitive to demand are in the red zone (for example, cars on the import duty and vegetables on the seasonal unavailability), but the pace of inflation normalization after the surge looks positive. Still, we do not see the CBR ready to take risks.

Household inflation expectations remained at their December peak of 13.4%, reached on the expected administrative price rises. On the contrary, business inflation expectations continued rising: to 30.1% (+4.9pps) for the next three months and 13% (+3pps) currently. February's business survey will be published later today. A reversal in price expectations or further decline in the business climate could theoretically support a rate cut, but alone it cannot be enough.

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Budget risks may become the main constraint for cutting the key rate. The January deficit was RUB 1.7tn, or 45% of the full-year target of RUB 3.8tn. The FinMin had warned that the start of the year would see a significant deficit due to the fall of oil&gas revenues and the advance funding of military spending, so February should follow the same pace and possibly even exceed the January level. That said, the decline in oil&gas revenues is itself a major factor. In January, oil&gas revenues fell 50.2% y/y, which should be covered by the National Wealth Fund. Total revenues declined 11.6% y/y. As the Urals price rose only moderately and exports can drop further due to lower purchases by India, February is again expected to bring low oil revenues with an additional risk coming from non-oil revenues.

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The economy accelerated in December and the EconMin estimated monthly GDP growth at 1.9% and Q4 GDP growth at 1.0%. We recall that the CBR expected Q4 growth not to exceed 0.5% (with a range starting from -0.5%). Thus, EconMin's assessment may support a decision to keep the key rate unchanged. Rosstat will publish the full Q4 breakdown in April, but we assume that both in Q4 2025 and Q1 2026, the composition remains the same, with war-related manufacturing and the state sector driving growth, while extraction industries continue to contract. This aligns with the budget risk argument: continued advance spending in February could accelerate growth, making a rate cut excessive.

However, some real-sector trends are positive for the CBR: wage growth slowed to 12.8% y/y (-1.5pps) in nominal terms and 5.8% y/y (-0.3pps) in real terms in November, and real disposable income, despite annual salary bonuses paid in December, rose 5.8% in Q4, down from 7.7% in Q3 and 10.1% in Q2. That, despite still very tight labour market with 2.2% unemployment rate, imply that despite the labour shortages employers may not be ready to increase wages further.

Next MPC announcement: Mar 26, 2026

Current policy rate: 6.75%

EmergingMarketWatch forecast: 6.75%

The central bank started 2026 with a cautious hold, leaving the repo rate unchanged at 6.75% in January after delivering 100bps of cumulative easing during 2025. The MPC paused in order to assess incoming data rather than signal the end of the easing cycle and two of the MPC members did support a 25bps cut. We expect the next window for a rate cut may open at the May or July meetings, once further confirmation of the disinflation trend becomes available.

January inflation data shows that headline CPI slowed marginally to 3.5% y/y from 3.6% in December, broadly in line with the SARB's near-term projection of around 3.3% for the first quarter. While the print was slightly above consensus, the overall trend remains consistent with inflation stabilising near the midpoint of the target range. The data suggests that even if fuel prices remain unchanged or slightly higher in March, the SARB's short-term inflation forecast remains intact. In this context, the January release strengthens confidence that inflation is moving in the right direction, albeit gradually.

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January core inflation dynamics is relevant to the MPC. Core inflation edged higher to 3.4% y/y, driven by seasonal services repricing early in the year. Services inflation remains sticky at 4.2% y/y, highlighting the persistence of domestic price pressures. In contrast, goods inflation slowed further to 2.7% y/y, reflecting easing supply-side pressures. This divergence between sticky services and cooling goods prices mirrors the SARB's repeated emphasis on the need for lower services inflation before accelerating rate cuts.

Food inflation dynamics also remain mixed but broadly supportive of the disinflation narrative. Food inflation held steady at 4.4% y/y, with many staple products now in deflation or experiencing slower price growth. However, meat prices remain a key pressure point, rising 13.5% y/y, reflecting disease-related supply disruptions. Base effects and government interventions are expected to ease meat inflation from mid-year, which should further reduce overall food price pressures.

The SARB said in January that 2026 inflation is projected at 3.3% and should then stabilise around 3.2-3.3% over the next two years before reaching the 3% target in 2028. The near-term moderation is supported by lower oil price assumptions and a stronger starting point for the rand. Risks are assessed as broadly balanced, with a firm currency and lower energy prices offsetting uncertainty from the global environment. Nevertheless, the SARB continues to monitor electricity tariff risks closely, particularly the possibility of additional Eskom recovery that could nudge inflation slightly higher in later years.

Despite the improved inflation outlook, the SARB continues to view the current policy stance as moderately restrictive, with neutral rates only expected to be reached in 2027. Inflation expectations have declined decisively but still need to fall further before the MPC becomes comfortable accelerating the easing cycle.

Monetary Policy Committee Statement

• Next Policy Meeting: Mar 25
• Overnight Policy Rate (OPR): 7.75%
• Previous Decision: Hold (Jan 28)
• Our Forecast: Hold
• Rationale: Inflation is rotating upward as expected, reserves remain stable, and reconstruction momentum is building, but delayed IMF review and fragile remittance sustainability justify maintaining the current stance.

There is little urgency to adjust rates as the Central Bank of Sri Lanka approaches its March policy meeting. After rapid 250 bps easing between March and May 2025, the CBSL has held for four consecutive meetings, allowing earlier accommodation to transmit through credit markets while monitoring inflation normalisation and external buffer dynamics. January's data confirm the narrative: inflation is drifting toward target from ultra-low levels, growth is absorbing the cyclone shock through reconstruction activity, and external accounts remain supportive despite modest reserve slippage. Policy sequencing, not incremental easing, defines this juncture. With monetary conditions still accommodative and the IMF's fifth review delayed, the CBSL is likely to prioritise stability optics and transmission assessment over further rate cuts.

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Inflation dynamics

Inflation continues its gradual ascent from deflationary lows. Colombo CPI rose 2.3% y/y in January, accelerating from 2.1% in December, driven by food price increases as Cyclone Ditwah's supply-chain disruption filtered through markets. Food inflation climbed to 3.3% y/y from 3.0%, while non-food inflation held steady at 1.8% y/y. On a sequential basis, the index advanced 0.6% m/m, reflecting the monthly food-led uptick. Core inflation, which strips out volatile items, eased to 2.3% y/y from 2.7%, suggesting that underlying price pressures remain contained despite headline acceleration. This divergence, headline rising on cyclone-related food effects while core moderates, reinforces that inflation is rotating upward from a floor rather than signalling demand overheating or sustained cost-push dynamics.

The CBSL projects inflation will gradually reach the 4-6% target band by mid-to-late 2026, converging toward the 5% medium-term anchor. Expectations remain well anchored, with no signs of destabilisation despite supply shocks. However, the central bank has flagged upside risks from domestic credit growth, potential exchange rate depreciation, and external price volatility, factors that argue for policy patience rather than premature easing.

Inflation is behaving as expected: rising but controlled, food-driven but not broad-based, normalising but not overshooting. This trajectory provides neither rationale for tightening nor urgency for further cuts. The CBSL can afford to wait, in our view.

Growth momentum

Sri Lanka's economy expanded 5% y/y over the first nine months of 2025, with activity continuing into Q4 despite cyclone-related disruption. Reconstruction demand is now acting as a partial growth anchor in early 2026, though operational constraints remain significant. Tourism and related services are benefiting from rebuilding activity spillovers, hospitality demand from reconstruction teams, and infrastructure deployment cycles. Agriculture, however, faces steeper challenges, with irrigation network disruption and replanting timelines slowing rural output recovery, particularly in export-linked crops. Private sector credit showed sustained momentum in late 2025 and is expected to receive further support from public reconstruction efforts and concessional financing programmes in 2026. The cyclone's estimated USD 4.1bn in damages creates material fiscal pressure, but reconstruction spending should provide near-term demand support, offsetting some of the output drag.

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Tourism earnings declined 6% y/y to USD 378.5mn in January, reflecting persistent pressure on per-capita spending even as visitor arrivals surge. On a sequential basis, however, inflows rose 23% m/m, reflecting typical seasonal uplift. The mixed signal record volumes but softer earnings underscore that tourism recovery remains incomplete and vulnerable to external sentiment shifts. Growth is broadening, but not accelerating sharply. Reconstruction provides a stabilisation mechanism rather than a transformative impulse. This is not a growth environment requiring monetary backstopping through further rate cuts.

External Conditions

Sri Lanka's external position remains supportive but fragile. The current account posted a USD 45.2mn surplus in December 2025, a sharp turnaround from a USD 509.1mn deficit in December 2024, driven by strong remittance inflows and an improved services surplus that offset a wider merchandise trade gap. The cumulative current account surplus reached USD 1.73bn in 2025, up 43.8% y/y, marking one of the strongest external positions in recent years. Worker remittances climbed to a new monthly record in January, rising 31.1% y/y to USD 751.1mn and exceeding the previous high of USD 729.1mn recorded in January 2018. The full-year 2025 outcome of USD 8.07bn, a 23% y/y increase, comfortably surpassed the earlier peak of USD 7.24bn seen in 2016. Remittances remain Sri Lanka's most reliable source of foreign exchange and a critical buffer for both the balance of payments and domestic consumption during post-crisis recovery.

However, official reserve assets edged down marginally in January, declining 0.2% m/m to USD 6.82bn from USD 6.84bn at end-December. Foreign exchange reserves fell 1% to USD 6.68bn, reflecting routine balance of payments flows rather than a sharp external shock. Partly offsetting this, gold holdings rose 26.8% m/m to USD 109mn, providing a modest diversification benefit though gold remains a small share of total reserves.

The rupee depreciated 5.6% over 2025 but has shown limited volatility in early 2026, suggesting contained market expectations. External stability is holding, but reserves are not building sequentially at a pace that would justify confidence in accelerating reserve accumulation. Import growth continues to outpace export gains, increasing the risk of renewed external pressures, especially as post-cyclone recovery imports pick up.

IMF Programme Uncertainty

An IMF team wrapped up a six-day visit to Sri Lanka on Jan 25, focused on assessing Cyclone Ditwah's economic fallout and determining next steps under the country's Extended Fund Facility (EFF) programme. However, the mission did not finalise the delayed fifth review, which is required to unlock the sixth tranche of Sri Lanka's USD 2.9bn bailout. Mission chief Evan Papageorgiou reiterated the IMF's readiness to continue supporting Sri Lanka's macroeconomic stability and reform efforts, signalling plans to return for full policy discussions "at the earliest possible juncture." Originally anticipated to conclude the fifth EFF review, the mission was recalibrated into a fact-finding visit following the cyclone.

The delay in completing the EFF review increases near-term uncertainty over the timing of the sixth IMF tranche but signals flexibility in programme timelines due to exogenous shocks. For the CBSL, this uncertainty argues for maintaining the current policy stance rather than easing prematurely. Any perception that monetary policy is loosening while IMF conditionality remains under assessment could undermine confidence in Sri Lanka's reform commitment and external financing credibility.

Outlook

The CBSL's stance remains recovery-enabling but stability-first. The central bank has held rates at 7.75% for four consecutive meetings since the rapid easing concluded in May 2025, allowing transmission to work through credit markets. Our base case is a hold in March. Further easing, if any, will be shallow and conditional, requiring inflation to stay anchored below 3%, reserves to build sequentially, and IMF programme credibility to hold post-fifth review completion. The next policy shift will be driven by operational durability of domestic recovery, sustained reserve accumulation, and clarity on external financing rather than headline macro stress or cyclone reconstruction demands.

Further reading

Latest MPC decision

Calendar of MPC meetings

• Next MPC meeting: Apr 29
• Current policy rate: 1.00%
• EmergingMarketWatch forecast: Hold
• Rationale: MPC statement of Feb 25

We think that BOT's Monetary Policy Committee (MPC) will likely keep the policy interest rate unchanged at 1.00% in its meeting on Apr 29, the second one for 2026. On Wednesday, the MPC voted 4 to 2 to reduce the policy interest rate by 25bps to 1.00%, effective immediately. Two MPC members favoured a hold decision. The MPC's decision was a surprise, as polls by both Bloomberg and Reuters had predicted that the committee would keep the key rate unchanged.

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The vote in favour of a 25bp key rate cut is intended to support the economic recovery; further ease debt burdens for SMEs and households; and anchor medium-term inflation expectations given increased downside risks. The two MPC members who backed a hold decision held the view that the existing monetary policy stance is still consistent with the economic and inflation outlook. Furthermore, previous policy interest rate reductions continue to take effect.

The prevailing monetary policy framework aims at maintaining price stability, supporting sustainable growth and preserving financial stability. The present key rate level reflects a sufficiently accommodative monetary policy stance and is consistent with the economic outlook, according to the MPC. The current policy rate is also seen as helping a gradual return of inflation to the medium-term target range. It is also important to monitor closely a potential build-up of medium-term financial imbalances amid the low policy rate, the MPC said.

Looking ahead, the committee places priority on protecting medium-term financial stability and preserving the limited monetary policy space amid elevated uncertainties. While the monetary policy stance is seen as sufficiently accommodative and aligned with the economic outlook, monetary policy alone cannot tackle the subdued economic growth caused by structural factors. The MPC sees a need for coordinating various policies to boost productivity and enhance competitiveness of the business sector, along with other targeted financial measures.

Economic growth

Thailand's GDP growth in Q4 2025 was higher than the previous assessment, the MPC said. This reflected both temporary factors at the end of 2025 and stronger-than-expected underlying momentum, especially in private investment and merchandise exports. The latter is expected to carry through into this year and next year. The performance of goods exports and private investment is expected to be better than the previous assessment.

However, the MPC expects below-potential economic expansion in 2026 and 2027, which will be uneven across sectors. The committee expects real GDP growth of about 2.0% this year and next year. The below-potential performance will be caused by structural obstacles and intensified competition. The MPC projects that private consumption will decelerate from 2025.

Inflation

Relative to the previous assessment, downside risks to headline inflation have increased because of the downward trend in energy prices and potential additional measures of the government, as well as limited demand-side pressures. The MPC now expects headline inflation to return to the 1-3% target range in H2 2027, rather than in the previously expected H1 2027. The MPC also expects slightly lower core inflation relative to the previous assessment. The core inflation will remain low.

Nonetheless, the lack of broad-based declines in the prices of goods and services suggests that deflationary risks continue to be low. Medium-term inflation expectations have decreased slightly but continue to be within the target range. The MPC sees a need to monitor closely deflationary risks.

Lending

The contraction in overall credit persists, whereas SME and household liquidity continues to be tight. In line with previous policy rate reductions, interest rates in the banking system and the financial markets have decreased. While this helped lower financing costs and ease debt burdens for businesses and households, borrowing costs keep rising for SMEs with high credit risks. One reason is that financial institutions continue to be cautious in providing loans to new borrowers and to high-risk borrowers.

The MPC sees a need to monitor closely the monetary policy transmission, as well as credit growth. The committee also supports further targeted financial measures aimed at assisting vulnerable groups.

Exchange rate

The exchange rate of the Thai baht is USD/THB 31.091 at the time of writing, which compares with USD/THB 31.47 on Dec 17, the date of the previous MPC meeting. The exchange rate was USD/THB 34.29 on Jan 1, 2025.

The baht has appreciated against the US dollar, given the outlook for the US policy interest rate path, as well as specific factors for Thailand, the MPC said. This has tightened financial conditions for exporters, especially with respect to products that are subject to intense price competition and have thin profit margins.

The MPC is concerned about signs of exchange rate misalignment from economic fundamentals. It hence sees a need to monitor closely transactions that exert significant pressures on the baht, as well as to review the effectiveness and adequacy of the already implemented measures on gold-related and other financial transactions.

Further reading

MPC decision of Feb 25

Schedule of MPC meetings

Edited minutes of MPC meetings

Monetary policy report

• Current rate: 15.0%
• Next rate decision: Mar 29
• Our forecast: on hold

The central bank (NBU) has begun an easing cycle, cutting the key policy rate by 50bps to 15.0% on Jan 29, effective from Jan 30. The NBU explained its decision by steady disinflation and sufficient foreign assistance inflow. The headline CPI inflation slowed to 8.0% y/y in December from 9.3% in November, on the back of a better grain harvest and a stable FX market. Core inflation also slowed further to 8.0% y/y in December. Disinflation must have continued also in January.

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At the same time, the NBU expects the 5% inflation target to be reached only in mid-2028, rather than at end-2027, as it predicted last October. The damage incurred on the energy sector by Russian missile strikes this winter will affect prices and, coupled with low base effects, it will trigger moderate inflation acceleration H2 2026, the NBU predicted. Consequently, the NBU now expects inflation to slow to 7.5% by end-2026, whereas last October it forecast 6.6% inflation at end-2026. The NBU indicated on Jan 29 that it intends to cut the key rate to 14.5% in Q2 2026 and to leave it unchanged after that till 2027. Thus, another cut is unlikely in March, when the next rate decision is expected.