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

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

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

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

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

• MPC meeting: Nov 4-5, 2025
• Current policy rate: 15.00%
• EmergingMarketWatch forecast: Hold

The BCB's Monetary Policy Committee (Copom) said that inflation dynamics have turned out to be more benign than anticipated, but the inflation outlook remains adverse, requiring a tight monetary policy for a very prolonged period, according to the minutes of its Aug 16-17 meeting released earlier this week. The Copom, which kept the Selic unchanged at 15.00% in August for the second consecutive meeting, said the improved inflation scenario was linked to a stronger exchange rate and more supportive commodity prices. Still, it emphasized that pressures from the robust labor market have sustained services inflation, leaving core inflation above the level consistent with meeting the 3.00% inflation target.

Inflation expectations also remain a key concern for Copom members, requiring perseverance, firmness, and caution in the conduct of monetary policy to ensure expectations are re-anchored to the 3.00% target, the committee said. The Copom further noted that while short-term expectations in the Focus Report have edged lower, expectations for longer horizons remain above the target, thus mandating the restrictive policy.

The committee also stressed that monetary policy has now entered a new stage, in which it is assessing whether holding the Selic rate steady at 15.00% for a sufficiently long period will ensure convergence of inflation to target. This supports expectations that the Selic will remain at the current level at least until year-end, in our view. The Copom added that recent data indicate economic activity continues to slow, albeit with mixed signals, consistent with an economy at an inflection point. However, the labor market remains tight, cushioning the impact of higher interest rates and delaying disinflation, supporting the need for a tight Selic rate for a longer period.

Overall, the Copom kept its hawkish tone in the minutes, but chose not to provide forward guidance, though it did stress that it would not hesitate to raise the Selic again if necessary. The committee has not formally indicated the end of the tightening cycle, but we believe it has already ended and the hawkish tone aims primarily to reinforce the BCB's credibility amid fiscal concerns and external uncertainty. We expect the Copom to hold the Selic unchanged until year-end despite recent comments from Finance Minister Fernando Haddad that he sees room for cuts. Just as the Copom did not let politics influence the hiking cycle in early 2025, we do not expect government remarks to pressure the committee into starting the easing cycle earlier than 2026.

• Next MPC meeting: Nov 6, 2025
• Current policy rate: 3.50%
• EmergingMarketWatch forecast: hold

Rationale: The CNB board was very predictable this time, and there were no surprises. The vote to keep the policy rate unchanged at 3.50% was again unanimous, as in August, and economic conditions have not changed much since then. The tone of the post-meeting statement was again on the hawkish side, and the outlook continues to be perceived as inflationary overall. The potential impact of introducing the ETS2 in 2027 was added as an inflation risk, which only adds to inflationary factors. Meanwhile, the possibility for a slower-than-anticipated German growth was mitigated due to fiscal expansion.

We expect to hear more of the same language after the post-meeting blackout ends when the minutes of the September MPC meeting are published on Oct 3. There was a surprising absence of disagreement on the monetary policy course in August, and we expect to see the same this time around. Furthermore, CNB governor Ales Michl said outright that the board did not mind a stronger CZK, and it was one of the reasons why the board did not believe monetary conditions needed to be tighter. Thus, it appears that the more hawkish-minded board members are happy with things as they stand, which is why we are likely not to see any hike proposals any time soon.

We see the next inflexion point being the 2026 budget bill, which will be likely rewritten by the new government. Since this will likely happen in late February 2026, it will be after the first MPC meeting in 2026, scheduled for Feb 5, 2026. This is why we expect that the first opportunity for a shift in policy will be at the MPC meeting in March 2026, and not earlier. If ANO, which will likely lead the next government, makes good on its generous fiscal promises, then a rate hike will be the most likely response from the CNB. Michl has been hammering quite long about the risk from a fiscal expansion, so he will be expected to put his money where his mouth is. Even if he stalls, due to his close ties with ANO leader Andrej Babis, there are enough people on the board who will do the job for him. On the other hand, if ANO decides to remain orthodox and not hurry with spending expansion, then we may see a rate cut as early as in Q1 2026. Yet, we doubt the next government will make the CNB's job easy, which means that monetary conditions will only get tighter from where we stand.

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Further Reading:

CNB board statement from latest MPC meeting, Sep 24, 2025

Post-meeting press conference, Sep 24, 2025 (in Czech)

Q&A after the latest MPC meeting, Aug 7, 2025

Minutes from the latest MPC meeting, Aug 7, 2025

Monetary Policy Report, August 2025

Macroeconomic forecast, August 2025

Meeting with analysts, Aug 8, 2025

CNB board profile

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

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

• Next MPC meeting: August 28, 2025
• Current policy rate: 22.5%
• EmergingMarketWatch forecast: 20.5% - 21.5%

The next MPC meeting is on October 2, and we expect that the committee will continue the easing cycle after delivering an expected 200bps rate cut in August. Following the positive CPI inflation report for August, we are penciling a 100-200bps rate cut, barring any major deterioration in global trade or regional security situation. Despite the surge of portfolio inflows over the past year and a half, Egypt has managed to boost its resilience to external shocks and the latest two major external shocks - the US tariffs announced in early April and the 12-day war between Israel and Iran mid-June - had limited impact on the country. Further, the pound has gained some strength since early July, partly due to capital inflows and partly due to US policy to weaken the US dollar, which will allow the CBE to cut the interest rates.

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The CBE slightly revised its baseline and alternative annual headline inflation forecasts and now sees inflation averaging 15-16% in 2025, up from its 14-15% forecast, and 11-12% in 2026 (previously: 10-12.5%). Still, headline inflation is expected to remain contained during H2 2025 driven by the cumulative impact of monetary policy tightening and favourable base effects. Consumer inflation is expected to moderate during 2026, albeit at a slower pace given the expected drag effect from the fiscal measures aimed at tightening the fiscal stance. As such, underlying inflation is expected to converge to its historical average over the medium term as inflation expectations improve further.

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GDP growth recovered in 2024/25, as the FX shortages were eliminated, manufacturing rebounded, FDI inflows picked up, and tourism inflows remain resilient. Remittance inflows soared following the FX reform from March 2024, which supports private consumption. The MPC said that GDP growth should reach its full potential by mid-2026 and the negative output gap is helping to reduce inflationary pressures. Beyond that point of convergence, demand-side inflationary pressures may begin to surface, but the central bank expects that these pressures will remain contained under the current monetary policy stance.

Monetary Policy Committee Statement

Monetary Policy Review

• Next MPC meeting: Sep 23, 2025
• Current policy rate: 6.50%
• EmergingMarketWatch forecast: Hold
• Rationale: MPC highlights careful and patient policy approach, need to maintain tight monetary conditions

The MPC is likely to continue its no-change policy on the next meeting in September and this stance is likely to be maintained in the longer term as well. The MPC last kept the policy rate unchanged at 6.50% on its meeting in August and also maintained the overnight interest rate corridor at 1pp around the policy rate. The decision was unanimously expected as it fit the policy guidance for a prolonged hold on the policy rate. According to the updated NBH forecasts, inflation will remain above the 4.0% upper band of the tolerance range around the 3.0% mid-term inflation target and will start slowing as of early 2026. The mid-term objective was expected to be achieved in the beginning of 2027. Recent inflation developments showed that corporate pricing behaviour remained strong outside the margin cap limits, the NBH has pointed out in August.

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The MPC continued to highlight its prioritisation of the price stability objective over any stimuli for economic growth, according to its statement after the August meeting. It repeated the main elements of its policy guidance and NBH governor Mihaly Varga specifically emphasised that the policy guidance was unchanged from the earlier months. Monetary policy will continue to be based on a cautious and patient approach, in our opinion implying the lack of prospects for quick changes in the policy stance. Tight monetary conditions have to be maintained because of uncertainty and inflationary risks related to the geopolitical and global trade conflicts, it said. Ensuring positive real interest rates remained an explicit feature of the monetary policy stance. Consumer inflation expectations have eased recently but remained elevated and their level was not in line with the price stability objective, Varga highlighted after the meeting. Increased tariffs have added to inflation expectations, the MPC warned further. The increase in global food prices and sustained market services inflation represented additional pro-inflationary risks, it pointed out. The fight against inflation was not over yet, Varga cautioned, in our opinion highlighting that monetary policy easing cannot return to the agenda yet.

The MPC approved a surprise cut in the reserve requirement ratio on its meeting in July. The ratio was cut by 2pps to 8% as of Aug 1, while the non-interest bearing share of the required reserves was left at 2.5% of the reserve base. The loosening of the reserve ratio followed the gradual decline of the excess liquidity of the banking system in H1 and will ensure that liquidity developments are neutral towards the monetary transmission, the MPC highlighted. The reduction of the reserve ratio therefore does not mean a change in the continued tight stance of monetary policy, it stressed. Varga also underlined that the adjustment of the required reserve ratio should not be considered a change in the monetary policy stance and explained that it was meant to counter the tightening of liquidity from the expiration of the five-year collateralised loans that were disbursed as support for the banking sector during the coronavirus epidemic.

Post-meeting MPC statement from August rate-setting meeting

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

Minutes from August MPC rate meeting

Inflation Report - Q2/2025

MPC meeting calendar 2025

• Next Policy Meeting: Sep 29 - Oct 1
• Current Policy Rate: 5.50%
• Last Decision: Hold (Aug 6, 2025)
• Our Forecast: Hold
• Rationale: Having delivered a cumulative 100bps of easing between February and June 2025, the RBI paused in August, and a further hold looks most likely in the upcoming decision. Policymakers have emphasized that future rate actions will be firmly anchored to incoming data and overall macroeconomic stability.

At its August meeting, the Reserve Bank of India's Monetary Policy Committee (MPC) kept the repo rate steady at 5.50%, following June's front-loaded 50bps reduction. The standing deposit facility (SDF) and marginal standing facility (MSF) were maintained at 5.25% and 5.75%, respectively. The decision was unanimous, underscoring the committee's view that policy transmission from earlier cuts is still unfolding. The RBI reiterated that while supporting growth remains a priority, any further easing will be gradual and data-contingent.

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Inflation Outlook

The disinflation trend has deepened. CPI inflation dropped to 1.5% in July, edging down from 2.1% in June and marking the lowest reading in over six years. Food inflation stayed negative for a second consecutive month, with both rural and urban food prices declining, led by continued softness in vegetables, pulses, cereals, and dairy. A favorable monsoon and robust agricultural yields are reinforcing this trend. However, massive rainfall in key agriculture states risks the chances of strong farm output this year. The risk is contained currently but the RBI will track this before making further moves.

In its August policy update, the RBI revised FY26 inflation forecasts lower to 3.0% (from 3.1% earlier), while cautioning that price pressures may firm in late FY26 as global energy prices stabilize and base effects fade.

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Growth Momentum

India's Q1 FY26 GDP expanded by 7.8% y/y, up from from Q4 FY25's 7.4%. Sectoral momentum remains broad-based: construction surged 7.6%, public services rose 9.8%, agriculture expanded 3.7%, and private consumption grew 7%.

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High-frequency activity indicators remain resilient. The August manufacturing PMI print came in at 59.3, signaling robust demand across sectors. GST collections stayed buoyant at INR 1.86tn in August, supported by strong consumption. The government's recent personal tax relief measures and the GST reform are also expected to lift household purchasing power and underpin consumption through H2 2025. Overall, the RBI is likely to give more time for the cumulative 100bps easing to filter through before considering fresh action.

External and Financial Conditions

India's external balance remains stable. The current account posted a surplus of USD 2.4bn in Q1 FY26, helped by resilient services exports and a softer oil import bill. FX reserves stood at USD 694.5bn as of Aug 29, covering over 11 months of imports, despite intermittent intervention-driven drawdowns.

System liquidity is in surplus, aided by the phased 100bps CRR reduction to 3% (effective November) and ongoing FX inflows. Cumulative RBI liquidity injections since January now total INR 9.8tn, keeping money market rates anchored.

On the currency side, the INR has weakened modestly, trading at 87.6 per USD as of early September, pressured by widening goods trade deficits and higher imports from the US and China. External risks remain pronounced, with global tariff frictions intensifying and US trade policy toward India under review. President Trump's renewed warnings on penalising India's Russian crude imports, coupled with 50% duties, have added to market jitters. Near-term INR pressures are likely to persist.

Conclusion

Following 100bps of easing in early 2025, the RBI appears firmly in wait-and-watch mode. Inflation is running well below target, real rates are close to neutral, and growth remains healthy. However, risks from external headwinds, latent services inflation, and volatile trade dynamics counsel caution. Governor Malhotra has reiterated that future policy decisions will remain "calibrated and data-driven," suggesting a longer pause. We expect the RBI to hold rates through the October policy window, with scope for re-assessment in late FY26 if growth softens or disinflation runs deeper than the RBI's comfort zone.

Further reading

Last MPC decision

Minutes of the Monetary Policy Committee Meeting (August)

RBI Forward Looking Surveys

Calendar of MPC meetings

• Next policy meeting: Oct 21-22
• Current policy rate: 4.75%
• Our forecast: Hold
• Last decision: Cut, 25bps (Sep 16-17)
• Rationale: BI to focus on liquidity provision, evaluate impact of last three rate cuts

Bank Indonesia cut the key rate by 75bps cumulatively in the last three MPC meetings, bringing the monetary easing cycle to five rate cuts (125bps) since the beginning of the year. The central bank justified the rate cuts with the need to support GDP growth in a low-inflation environment, as the rupiah has stabilised against the dollar.

So far, the central bank has become more and more dovish in light of the low inflation and economic growth slowdown. Moreover, CPI inflation remains subdued and below the midpoint of the central bank's 2.5+/-1% target band. Although it has started to rise, inflationary expectations remain firmly anchored to the central bank's target.

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GDP growth

GDP growth accelerated to 5.12% y/y in Q2 from 4.87% y/y in Q1. Despite the surprising acceleration, BI proceeded with the latest rate cuts, attributing the strong GDP growth to the front-loading of exports to the US in anticipation of the introduction of the 19% import tariffs in August. BI has maintained its GDP growth forecast at 4.6-5.4%, while most IFIs and rating agencies have their forecasts even lower at 4.7-4.9% in 2025.

In addition, the government also lowered its GDP growth forecast to 5.0% from 5.2% previously, though even this number now looks optimistic. Private consumption has been slowing down, dragging down overall GDP growth. On the bright side, export prospects have improved, particularly with the recent trade agreement with the US, which saw the US lower the import tariffs on Indonesian goods to 19%.

Exchange rate stability

The rupiah has strengthened since the beginning of May, erasing some of the losses accumulated in March and April. As a result, its YTD depreciation has eased to about 1%, with the exchange rate now back into the USD/IDR 16,100-16,300 level. This has given the BI confidence to slash the key rate.

The governor stated that Bank Indonesia will continue to use its tools to keep the local currency stable. In fact, the BI has been regularly intervening in the forex market since the beginning of the year, when volatility increased due to capital outflows seen in other EMs as well.

Moreover, expectations for a Fed rate cut have given Bank Indonesia further confidence to slash the key rate as pressure on the rupiah has eased significantly.

Inflation environment

CPI inflation accelerated to 2.31% y/y in August from 2.37% y/y in July, thus returning to more normal levels overall the last two months.

Looking forward, inflation expectations have also shifted towards lower inflation this year, with most projections pointing to CPI inflation remaining below the midpoint of the central bank's 2.5+/-1% target band by the end of the year. The latest IMF forecast points to 1.7% CPI inflation this year.

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

As a result, BI had ample room to cut rates, given that inflation is well below its target. The impact of imported inflation also seems subdued, as despite the rupiah's weakening, CPI inflation has remained below the BI's target.

Conclusion

Looking forward, we expect Bank Indonesia to keep the key rate on hold in Q4, in a bid to evaluate the impact of the last three successive rate cuts. Instead, we expect BI to accelerate its government debt purchases on the secondary market in Q4, focusing on liquidity provision and stimulating credit growth.

On the other hand, hopes for a Fed rate cut have grown due to the persistent low inflation in the US, which may prompt other central banks to follow suit and reduce rates as well.

Further reading

Last MPC press release

Calendar of MPC meetings

• Next MPC meeting: September 25
• Current policy rate: 7.75%
• EmergingMarketWatch forecast: 25bps cut

Recent consensus polls have shown the market now expects the Monetary Policy Rate (MPR) will close the year at 7.00%, in a swift correction considering consensus polls showed the market expected only a 25bps cut pending, leaving the policy rate at 7.50% to close the year. The revision seems linked to recent monetary easing by the Federal Reserve. However, we believe the dovish position assumed by the CB before such action by the Fed was enough to anticipate the MPR would fall below 7.50%.

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The market now seems to expect a 25bps cut in all the three sittings scheduled before year-end. This diverges from the pace of CPI inflation, in our view, considering core inflation reached 4.26% y/y in September H1, adding 8 fortnights above 4.00% and showing lingering upward pressure from some of its components. Indeed, at least one board member, Deputy Governor Jonathan Heath, continues to warn about this diverging trend, where the Monetary Policy Council (MPC) simply seems unconcerned with the fact that CPI inflation is in no path to converge to the CB's 3.00% target.

Analysts see CPI inflation slowing a bit below 4.00% by year-end, with core inflation remaining above such level, per Banxico's latest poll among analysts. The experts project disinflation thereafter, but anticipate general inflation will remain at or above 3.70% to close both 2026 and 2027. This means mid-term expectations are only loosely anchored, in our view, weakening the credibility of the CB's punctual 3.00% target.

Still, we are confident the MPC will agree to cut its policy rate by 25bps this Thursday in a 4-1 vote. It remains to be seen what discourse Deputy Governor Galia Borja has, particularly in the minute. This, considering Borja seems to be the board member more likely to eventually drop the dovish side of the board, weakening the consensus to continue easing. Indeed, we expect to see Borja pondering a pause to the easing cycle ahead, flagging a concern on high core inflation.

It will be interesting to see the position of Deputy Governor José Gabriel Cuadra later in the year, as we've been expecting him to take a more hawkish position down the road, particularly given concerningly high core inflation. We note this expectation is not based on any comments made by Cuadra yet but by his technical background, seeing him as more independent from the MORENA regime than Governor Victoria Rodríguez and Deputy Governor Omar Mejía, who we expect to remain very dovish even into 2026.

Although we expect the discussion of recent inflationary pressures to be limited in the September sitting, it will be interesting to see how the board processes the inflationary nature of the 2026 budget, which is still being looked at by Congress. Indeed, by imposing tariffs on some Asian imports and by raising taxes on sugary drinks and tobacco, the budget will have a shock on CPI inflation next year. The protectionism, with many details still pending, will hinder Asian imports, particularly from China, while pressuring prices up in several industries. This will have an inflationary impact next year. It's unclear if the inflationary pressure might be slightly offset due to retaliatory measures to be imposed by China.

Overall, we are confident the CB will cut its policy rate by 25bps on Thursday, bringing down the policy rate to 7.50%. We are confident the easing will come from a divided board. We expect the CB will vote for another 25bps cut in November and see the chances of another 25bps cut in September above 50%. Early 2026 easing is less clear, in our view, depending on the Federal Reserve's actions. Early 2026 monetary policy should depend on inflation data and mid-term expectations, but it might not, given the dovish stubbornness of the bulk of the board. Thus, we see the MPR falling to 7.00% by year-end, anticipating further easing in early 2026.

• Next MPC meeting: 24 - 25 November 2025
• Current policy rate: 27%
• EmergingMarketWatch forecast: 26.75%

The MPC's decision to lower the monetary policy rate by 50bps to 27% on Monday (Sep 23) was based on both recent data and forward-looking projections, according to CBN governor Olayemi Cardoso. He revealed that CBN staff expect continued declines in inflation through the end of 2025, driven by the lagged effects of previous rate hikes, stable exchange rates, falling petrol prices and the seasonal increase in food supply as the harvest progresses. Cardoso said improved crude oil production and rising capital inflows are also easing inflationary pressures and helping anchor expectations. All 12 MPC members supported the rate cut, the first in 5 years. The MPC will next meet in November and we anticipate another cut if disinflation continues.

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Nigeria's rate cut aligns with a broader trend across Africa as Ghana recently lowered its policy rate to 21.5% and Kenya to 9.5%, although Nigeria's rate remains the highest on the continent due to still-elevated inflation pressures. Analysts note that the easing signals confidence in the stability of Nigeria's FX market, backed a healthy current account surplus and higher reserves. Gross external reserves rose to a record USD 43.05bn as of September 11, providing an 8.28-month import cover.

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The MPC also discussed progress in bank recapitalisation, with 14 banks meeting new capital thresholds. Earlier in July, only 8 banks had met the threshold. Analysts view the 14-bank milestone as a positive step but warn that consolidation is likely as the deadline approaches in March 2026. In addition to the rate cut, the CBN reduced the cash reserve ratio (CRR) for commercial banks from 50% to 45% in an effort to stimulate lending and economic activity. A new 75% cash reserve ratio was also introduced on non-TSA public sector deposits. The committee cautioned that the banking system has excess liquidity mainly due to government fiscal releases. The new CRR measures are intended to absorb this surplus and help to control inflation.

Monetary Policy Committee Statement

Monetary Policy Committee Meeting Schedule

• Next policy meeting: Oct 27, 2025
• Current policy rate: 11.0%
• Last decision: Hold (Sep 15)
• Our forecast: Hold
• Rationale: With flood-driven supply shock projected to push inflation beyond the upper bound of the target range, the SBP would ensure that real interest rates remain adequately positive in line with IMF guidance

The State Bank of Pakistan (SBP) maintained the policy rate at 11.0% on September 15, marking the second consecutive meeting without a rate adjustment. The decision was widely anticipated, as the flood-induced supply shock had already led to shortages of perishable food items - including tomatoes, onions, and wheat flour - driving prices higher.

While the SBP noted that inflation eased in August and economic activity continued to gain momentum, the near-term outlook has worsened slightly due to the floods, which devastated large swathes of farmland in central and southern Punjab. The resulting crop losses are expected to push inflation higher, widen the trade deficit, and weigh on economic growth.

Nonetheless, the central bank downplayed the risk of significant damage to Pakistan's macroeconomic fundamentals. Expressing optimism about the economy's resilience compared with past major flood events - such as in 2022 - the SBP emphasised that the sharp inflationary and external account pressures witnessed after the previous floods are projected to remain contained this time.

We believe that the monetary easing cycle, which delivered a cumulative 1,100bps of rate cuts since June 2024, has effectively ended. With the SBP projecting inflation to climb above 7% in the coming months, the real interest rate on a spot basis would drop below 4pps, from around 8pps currently. Given the IMF's emphasis on maintaining adequately positive real rates, we expect the policy rate to remain steady in the near to medium term.

Inflation environment

CPI inflation eased to a four-month low of 3.0% y/y in August, down from 4.1% y/y in July. Core inflation also trended down, reaching a multiyear low of 7.8% y/y in rural areas. During Jul-Aug, the headline figure averaged 3.5% compared with 10.4% in the same period last year.

The SBP expected price pressures to pick up, mainly due to higher food prices, with inflation projected to exceed the upper end of the 5%-7% target range for most of the second half of FY26. However, the food price shock was viewed as temporary. Combined with lower electricity tariffs, a stable exchange rate, and subdued global commodity prices, these factors were expected to keep inflation contained. Overall, the SBP maintained its FY26 inflation forecast at 5%-7%.

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GDP growth

The SBP said that the ongoing economic recovery is under threat from the recent floods. Losses to kharif crops would affect the agriculture sector, which, along with supply chain disruption,s could also dampen activity in the manufacturing and services sectors in the near term. As a result, the SBP turned slightly cautious, projecting GDP to come in near the lower end of its earlier 3.25%-4.25% forecast range, though still an acceleration from 2.7% in FY25.

External sector

The SBP projected Pakistan's goods trade deficit to widen as losses to crops - mainly cotton, rice, sugarcane, and vegetables - hurt food exports while lifting food imports. The country's food trade deficit already surged 11-fold y/y to USD 695.1mn in the first two months of FY26, primarily on account of higher palm oil imports and a decline in rice exports. This, together with a sharp rise in imports of vehicles, machinery, plastic materials, and iron and steel products amid economic recovery, pushed the overall trade deficit to USD 6.0bn, up from USD 4.7bn in Jul-Aug FY25. However, the SBP expected proved US market access following a recent trade deal to support exports, which posted a fractional 0.6% y/y growth in Jul-Aug FY26.

Overall, the central bank kept its external sector outlook largely unchanged, projecting the FY26 current account deficit at 0-1% of GDP. Similarly, the forex reserves were forecast to rise to around USD 15.5bn by December 2025, up from USD 14.3bn as of September 5, supported by disbursements from multilateral creditors, including the IMF, bilateral debt rollovers, and sustained interbank purchases.

Conclusion

Overall, while the SBP remains confident in the economy's ability to absorb the impact of the floods, policy space appears limited going forward. With inflation risks tilted to the upside, the central bank is likely to prioritise price stability over growth. Until greater clarity emerges on the extent of crop losses and their second-round effects, the policy stance is expected to remain cautious. Therefore, we expect the SBP to maintain the status quo on the key rate in the near to medium term.

Further Readings

Previous policy rate decisions

SBP's The State of Pakistan's Economy report

Latest IMF staff report

• Next monetary policy meeting: Oct 9
• Current policy rate: 5.00%
• EmergingMarketWatch forecast: Hold or 25bp cut
• Rationale: MB statement of Aug 28; comments by Governor Remolona

We think that a hold decision and a 25bp policy rate cut are both possible at the next meeting of BSP's Monetary Board (MB) on Oct 9, the fifth for 2025. Last Thursday, the MB decided to reduce the key rate by 25bps to 5.00%. The decision was in line with market expectations, as well as our forecast. There will be two more MB meetings this year - on Oct 9 and Dec 11.

On Thursday and Friday, BSP Governor Eli Remolona Jr. suggested that one more cut is possible. He said he thinks they have space for one more cut in 2025 if the data develops the way they expect it. Further rate reductions will be justified only if there are indications of a lack of demand, according to him. While the BSP considers the inflation outlook to be very manageable and the inflation expectations to be well-anchored, its view is still that there are more significant risks to the inflation outlook than the output outlook, the governor said.

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Inflation

As of Thursday, the MB projects inflation of 1.7% in 2025, which compares with 1.6% expected in June. The inflation target range is 2.0-4.0%. The latest inflation forecasts for 2026 and 2027 are 3.3% and 3.4% respectively. In June, the respective projections were 3.4% and 3.3%.

The MB commented that the outlook for inflation is broadly unchanged and inflation expectations continue to be well-anchored. Over the policy horizon, inflationary pressure could rise due to possible electricity rate adjustments and higher rice tariffs.

The central bank projects August inflation to settle within the 1.0-1.8% y/y range, the BSP said in its month-ahead inflation forecast on Friday. The statistics office will release the CPI data for August on Sep 5. In August, upward price pressures likely came from higher costs of fruits, vegetables and fish due to unfavourable weather conditions. Other contributions to upside price pressures came from higher electricity rates and elevated domestic fuel costs, as well as the depreciation of the peso. Downward price pressures came from the continued decrease in rice prices and lower meat costs.

CPI inflation slowed down to 0.9% y/y in July from 1.4% y/y in June. The latest reading is the lowest since Oct 2019. The CPI rose by 1.7% y/y in Jan-Jul.

Economic growth

While the domestic demand has held firm, global economic activity continues to be affected by the impact of US policies on global trade and investment, and this could weigh on the outlook for the Philippine economy, the MB said.

On a related note, the Manufacturing PMI decreased slightly to 50.8 in August from 50.9 in July, according to the monthly survey by S&P Global that was released on Monday. The index has exceeded the 50.0 no-change threshold for five consecutive months. However, its level was below the long-run average.

Exchange rate

The peso is trading at USD/PHP 57.315 at the time of writing, which compares with USD/PHP 56.941 on Aug 28, the date of the latest MB meeting.

On Friday, Remolona said that they do not target the exchange rate. The higher probability of an interest rate cut by the US Fed does not worry the BSP too much, the governor said on Thursday. The peso is no longer depreciating when the spread between the key rates in the Philippines and the US narrows to less than 100bps, he noted.

Further reading

Press release after Aug 2025 monetary policy action

Schedule of monetary policy meetings

Highlights of MB meetings on monetary policy

Monetary Policy Report

• Next MPC meeting: Oct 7-8, 2025
• Current policy rate: 4.75%
• EmergingMarketWatch forecast: 4.75%

Rationale: The Monetary Policy Council has cut interest rates by 100bps since beginning its "adjustment" cycle -- which is not to be confused with an "easing" cycle, according to the MPC's wishes -- and all recent members' comments suggests only 25bps more remains to be cut this year. MPC member Ludwik Kotecki said on Sep 17 that there was a 50-50 chance of a cut in October or November, though we do think that is too high and there is probably less of a chance and more of a chance of a reduction in November, which will see the updated CPI and GDP projections released and will keep the current cadence of the MPC cutting every second month. It would also probably allow the MPC to pause the cycle more credibly.

Still, an October move can't be ruled out since it looks like the politicians will make good on pledges to further the household power price cap through Q4. The PLN 500/MWh cap expires at end-September, but the Senate passed to the president on Wed. the bill that would extend the deadline to end-2025. President Karol Nawrocki seems very likely to sign soon. This will remove a big inflation risk. NBP and MPC chair Adam Glapinski has said that if the power price rose to the current tariff of PLN 623/MWh (though a new as-yet-unset tariff is to go into effect on Oct 1), then power prices would rise 13% and that would lift CPI inflation by some 0.7pp. Glapinski even unveiled no-policy change forecasts showing CPI inflation of 3.6% y/y at year-end. However, inflation should now end the year close to 3% y/y and thus not far above the NBP's 2.5% target.

The MPC likely greeted the higher-than-expected core inflation reading of 3.2% y/y for August as working against a cut, but will be very keen on seeing the rest of the August data to be released in the coming days. The industrial production figure will be keenly watched, as will the retail sales reading. But the wage print will be among the most important. If wage growth were to jump in August, then that would probably ensure a cut will be moved back to November.

Fiscal policy will remain a break on easing, and there might be some attention paid to Moody's Ratings' review of Poland's rating set for Fri. If Moody's were to downgrade Poland, then that might work against October easing since it would raise further fiscal risk. Moody's might follow Fitch Rating's move and cut its outlook, with that unlikely to have a major monetary policy impact, although the more focus is put on sovereign ratings, the more the MPC is likely to fail constrained from cutting.

Archived video of all MPC press conferences

MPC's post-sitting statements

Latest council minutes

Latest NBP inflation report (July 2025)

Most recent MPC voting results

• Next MPC meeting: Oct 23, 2025
• Current policy rate: 40.5%
• EmergingMarketWatch forecast: Cut by 200-250bps
• Rationale: Materially positive real interest rate alongside base-effect disinflation provides room for calibrated easing

We anticipate the CBT will preserve its monetary accommodation path at the forthcoming MPC meeting and we expect the CBT to cut the policy rate by 200-250bps. This recalibration rested on four pillars. First, we expect the CPI to register about 2.1% m/m in September, materially below last year's 2.97%, mechanically lowering the y/y rate to roughly 31.8%. With the policy rate at 40.5%, the ex-post real policy rate stood near 8.7pps on headline CPI. Such a cushion might afford the CBT scope to deliver a further step in the easing cycle without immediately compromising disinflation credibility.

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Second, Turkey's recent CDS traded below its level preceding the Mar 19 detention of IMM mayor Ekrem Imamoglu, yet that compression reflected event postponement rather than resolution. The court adjourned the CHP congress annulment case to Oct 24, declined the precautionary reinstatement request for the party's former leadership and boards, and thereby deferred, not removed, political risk. The MPC decision will therefore precede a consequential legal milestone by one day, leaving markets exposed to headline risk that could reprice the term structure and narrow the CBT's tactical room.

Third, market colour indicated the CBT intervened heavily to stabilise the currency last week prior to the court case, with reported sales north of USD 10bn. Should the court's next stance shift against the CHP, or should investigations targeting CHP-led municipalities broaden, most recently the Bayrampasa operation, where the mayor and several suspects were detained, FX stability could come under renewed pressure. A resurgence of depreciation expectations would tighten financial conditions through the FX channel and argue for the smaller end of the envisaged rate-cut corridor to preserve market functioning.

Fourth, the latest GDP release signalled firm activity. Demand has cooled but not to the degree needed to anchor disinflation swiftly, in our assessment. This tension was clear in the CBT's target year-end inflation at 24% and upper bound forecast of 29% upper bound-versus our 30.5% expectation. In this regard, we infer that the output gap dynamics and sticky services disinflation argued for calibrated easing, stringent liquidity management and a communication stance that conditioned future steps on realised disinflation rather than calendar-based commitments. In practical terms, this favours a base-case 200bps cut with guarded guidance, while a 250bps move remains feasible only if post-MPC political headlines and FX conditions stayed benign enough to avoid risk-premium slippage.

Against this backdrop, governor Fatih Karahan's recent tone remained cautiously dovish on disinflation prospects. We therefore judge the MPC will choose between the lower and upper edges of the 200-250bps range as a function of three near-term variables - the September CPI run-rate and breadth, day-after political developments around the CHP case and the immediacy of FX-reserve use required to maintain market stability. Therefore, our modal view favours 200bps with data-contingent forward guidance, while a 250bps outcome requires a clean political tape and contained FX pressure to safeguard the credibility of the disinflation trajectory.

Summary of September rate-setting meeting (to be released on Sep 18)

MPC rate decision in September

Quarterly Inflation Report for Q3

Monetary policy strategy for 2025

• Next MPC meeting: Sep 9
• Current policy rate: 4.75%
• EmergingMarketWatch forecast: 4.75%

Rationale: The BCCh's Monetary Policy Council unanimously voted to cut its benchmark interest rate by 25bps to 4.75% in its Jul 29 sitting, considering this as the only plausible option. At the time the council agreed that the evolution of key variables was in line with the base scenario outlined in its last Monetary Policy Report from June. With this, the MPC established that its monetary policy corridor remained valid, and that a cut was warranted as the inflation convergence process to the 3.0% target advanced as expected. We believe this foreshadows 25bps or 50bps worth of cuts the rest of this year if the base scenario continues to apply, with the 25bps option as the most likely

In summary, the MPC sees the GDP advancing in line with its potential without any relevant output gap, inflation completing the convergence to the 3.0% monetary policy target by H1 next year, and expected inflation anchored at 3.0%. In this context, the MPC believes the monetary policy rate needs to advance gradually toward its neutral range over the next few quarters. There are still relevant risks tied to external geopolitical and commercial conflicts, but with no clear implications for domestic inflation yet.

We expect the MPC to hold in September before cutting again in Q4. In tactical terms, this is a prudent board overall that seems unlikely to cut twice in a row after being on hold for six months, especially when there is no rush and following a CPI reading that surprised the market to the upside. While lending activity and employment have been showing some weakness and provide a reason for cuts, economic growth has been fair. There is also a strong market consensus forecasting a hold for September, and this is a board that takes consensus very much into account and doesn't defy it unless it has a very good reason to do it.

Unrelated to the monetary policy rate discussions, the BCCh surprised by launching an FX reserve accumulation program at the end of last week. BCCh Governor Rosanna Costa emphasized that the program should not have a relevant impact on the exchange rate and that the USD purchases will be sterilized, so the central bank doesn't see the program as having any influence on the monetary policy rate strategy.

• Next monetary policy meeting: Sep 30
• Current policy rate: 9.25%
• EmergingMarketWatch forecast: Hold
• Rationale: upside inflation surprises and fiscal uncertainty

BanRep will decide on rates on Tues., Sep 30. We believe keeping the benchmark rate at 9.25% is the most likely outcome. However, a slight 25bps cut cannot be entirely ruled out. The decision will depend on whether the dovish minority can sway a swing voter -- highlighting how divided the bank's board has become.

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The seven-member board reveals little about its inner workings; individual votes are not disclosed, and members rarely offer public opinions. Nonetheless, two groups are apparent, as we have highlighted before. A hawkish group, led by Leonardo Villar, the governor, has emphasized the need to contain inflation and sustain fiscal credibility. It includes Mauricio Villamizar and Bibiana Taboada, both appointed by Iván Duque, the former right-wing president. A dovish trio -- Germán Ávila, the finance minister and board chair, along with César Giraldo and Laura Moisá, recent appointees of President Gustavo Petro -- has sought a faster easing. Between them sits Olga Acosta, also a Petro appointee, but with a technocratic background that we believe most likely aligns her with the hawks. The recent 4-3 votes in June and July have underscored the hawks' strong influence.

The economic outlook complicates the situation. Headline inflation increased slightly m/m to 5.1% in August, with core inflation at 5.3%. The latter has declined gradually but steadily since mid-2023. However, both remained well above the 3% target and the 4% upper limit of tolerable inflation. Output grew by only 2.1% in the second quarter, indicating a slowdown compared to last year. Likewise, investment decreased, posing a risk to future productive capacity. Conversely, the labor market has remained seemingly resilient: headline unemployment dropped to 8.8% in July, its lowest rate for that month since 2001, due to higher participation and rising wage growth. Still, the continued presence of informality and geographic disparities raises questions about the stability of these gains (note that August's employment report is due Tues. morning, while the Board will convene, though we expect it to be immaterial for the monetary policy decision). On the fiscal side, the deficit reached 4.3% of GDP through July, with public debt remaining above 60% of GDP in August. The government's own baseline predicts the deficit will increase further by the end of the year, reaching 7.1% of GDP, with market expectations edging higher, adding risk and reinforcing a hawkish stance to keep interest rates steady.

Another factor influencing the decision, which could challenge the hawkish stance, is the recent sharp appreciation of the COP against the USD in September. As we have noted, the government's monetization of its ongoing debt operations abroad has fueled this rally and driven yields lower across the sovereign curve. The dollar touched multi-year lows of 3,800 COP and has more recently traded around 3,900. Because the government has borrowed mainly in euros abroad and converted those funds into pesos, it has injected substantial liquidity into the domestic economy -- an inflationary move that runs directly against the central bank's objectives. The Federal Reserve's rate cut in mid-September has probably reinforced the effect, spurred capital inflows, and further fueled a carry trade between the peso and the dollar. This influx complicates BanRep's task by loosening financial conditions in an unconventional manner: the currency strengthens, asset prices rise, and liquidity expands, despite the policy rate being kept high. Still, a rate cut now would almost certainly be read by markets as abandoning the inflation-fighting mandate in favor of lowering the government's borrowing costs. That would raise the risk of "fiscal dominance," threaten the central bank's credibility, and, at worst, trigger a crisis of confidence. However, note that if global sentiment shifts, these inflows could reverse suddenly, leading to renewed peso weakness and market volatility.

All of this supports the case for holding rates steady. However, the doves would likely have their own arguments. The biggest risk to the base case is a sharper slowdown in activity, as noted, with a steep decline in fixed investment that could threaten the economy's future productive capacity. The dovish minority might also argue that keeping rates too high for too long could lead to a lasting loss of output. The strong labor market can make a case for the doves, though; although it appears strong, it shows mixed signs, as also noted.

Similarly, the doves could argue that real rates are punitive. With nominal rates at 9.25% and inflation around 5%, the real rate is roughly 4.25%, which could slow growth if it remains high for too long. They might point to weak investment and the risk of prolonged output losses. In their view, the cost of waiting might outweigh the inflation risks of an early cut. However, note that high real rates take months to fully impact credit and investment, so concerns about slowing growth could become more serious by the year's end.

Still, history advises caution. BanRep, a traditionally orthodox central bank, typically acts only when inflation clearly approaches its target or when growth risks dominate. A symbolic "trial" 25bps cut, rumored by a minority of market-watchers, could send mixed signals, weaken the COP, and increase imported inflation. Nevertheless, markets would interpret it as an early concession to fiscal needs rather than a decision based on data, as noted.

Overall, the balance still favors holding. Three arguments carry particular weight in our view: persistent inflation above target, fiscal risks that threaten credibility, and the steady hawkish tone of recent board minutes and public remarks by Governor Villar, Taboada, and Villamizar. A cut later in the year is possible, but only if September's and subsequent inflation prints surprise lower or if growth slows more sharply (though highly unlikely, as market rumors point to a 3.1% growth rate in Q3 2025). Until then, the hawks are likely to prevail -- though the government's influence within the Board, and the uncertainty of a single swing vote, means surprises cannot be ruled out.

• Current policy rate: 4.50%
• Next monetary policy meeting: Sep 29, 2025
• Expected decision: Hold, 25bps cut possible

The MPC left the policy rate unchanged at 4.50% on Aug 20, which was in line with expectations and was due to the still high geopolitical uncertainties and the still higher than the 1-3% target range inflation. The next policy rate decision would be on Sep 29 and we think that the rate-setters, who have many times stressed that the monetary policy they pursue would be prudent, might find it difficult to cut the rate again. Inflation did enter the target in August but some of its components are very volatile, which makes projections difficult, while other components, mainly from the non-tradable sector, continue to record relatively high price increases. In addition, uncertainties cloud the horizon with respect to the Gaza war and the fiscal policy because of the strong calls for higher spending. The army already started a ground operation as part of the government intention to take over the Gaza city while ties with major mediators in the talks with Hamas might have become more difficult after the Qatar strike that targeted Hamas seniors residing there. Moreover, Netanyahu did not rule out other strikes abroad. Any scenario for the war outcome bears risks and might raise the uncertainties, which the BoI might not like. Expanding the operation would affect economic activity while a truce might lead to a turbulence on the domestic political scene due to opposition on the part of the far-right parties for ending the war, we think.

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Inflation continued easing and eventually entered the 1-3% target band in August as it hit 2.9% y/y after exceeding 3% for more than a year. However, it came in higher than expected. A month ago, when the trend was more or less visible, the MPC stressed that inflation was still volatile and the non-tradable component inflation was still high. Most of the volatility is due to flight tickets after a change in methodology. Still existing supply side shortages that might not close fast enough to respond to potential surge in demand are another factor that can drive inflation higher. The draft of reservists is a major supply shortage and latest developments in Gaza suggest that labour market supply might worsen. Some upward impact might come also from rental prices after the damages to buildings by Iranian rockets, which is already seen in Jun-Aug prints. On the other hand, the shekel appreciation has been offsetting some of the upward pressure but it is not clear if the appreciation forces would continue and what forces would prevail in shaping inflation developments, we think. The latest inflation expectations, one of the major considerations the MPC is looking at when deciding on the policy rate, pointed to continued moderation in the inflation environment. The latest BoI forecast released in July sees inflation at 2.6% y/y in Q4 on average and at 2.2% y/y on average in Q2 2026.

GDP data point to a fall in GDP in Q2 but the BoI explained that this was the sole result of the Iran war and when excluded, GDP has continued increasing in Q2. It also said that high frequency indicators point to a strong recovery in the period since the hostilities with Iran ended and some indicators are at a higher level compared to the pre-Iran war position while others are still catching up. The BoI downgraded its growth forecast for this year in its July update but increased it for 2026 as recovery after the wars is expected to be faster. On the other hand, the impact of the new US import tariffs is expected to be lower. We note that US tariffs were expected to cut from growth 0.5pps each in 2025 and 2026, according to the BoI forecast from April. Thus, we think that the BoI might continue the cautious approach and make sure that inflation has been entrenched within the target interval and risks to geopolitical stability have decreased further before making any move, in our opinion. Yet, we do not rule out the MPC making a bold move with a 25bps cut later this month to capitalise on the lower inflation but we think that this scenario has a lower chance to come true. The research department expects the policy rate to reach 3.75% in one year from now. This is not a forecast of the MPC but has likely been endorsed and if fulfilled, this means three rate cuts in the next one year.

Board statements, press briefings, minutes from MPC meetings

Calendar of MPC meetings

Latest BoI macroeconomic forecasts

Monetary policy reports

Bank of Israel Law

The Monetary Committee

• Current policy rate: 16.5%
• Next monetary policy meeting: Oct 10
• Expected decision: hold

The NBK is currently expected to leave the base rate on hold in October due to a recent statement by the bank governor. He said the current course of 'moderately tight' monetary policy will be maintained amid ongoing inflationary pressures. We believe this implies the NBK is leaning more toward an on-hold decision despite this month's comment that monetary tightening has become more likely. Nevertheless, the NBK's stance could still change, in our view. We remind that August saw an increase of both core inflation and seasonally adjusted inflation. The CPI rate posted 12.2% y/y (from 11.8% y/y), so the September data will be crucial.

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CPI inflation is close to the upper range of NBK's revised year-end forecast (11-12.5%). This will be a concern despite the slight moderation of inflation expectations in August (13.6%). President Tokayev's autumn address to the nation highlighted inflation management as a priority for the government and the central bank. In this context, the NBK arguably has scope for action as far as monetary tightening goes. Given the likely escalation of inflationary tendencies after next year's tax amendments, the prospect of a rate hike will be discussed seriously, in our view.

At this stage, our baseline scenario is still for an on-hold decision due to the comment quoted above. Yet, we do believe the likelihood of tightening in 2025 has increased. If September's inflation report shows moderation, it might be delayed, but will still be a possibility. In case of stronger pressure, the NBK will likely consider a small hike (25bps-50bps) in order to manage pressures.

• Next policy meeting: Oct 23
• Current policy stance: 2.50%
• Last decision: Aug 28 (Hold)
• Our forecast: Cut by 25bps
• Rationale: Dovish Fed, cooling real estate prices and subdued inflation to enable more rate cuts

The Bank of Korea is likely to resume easing policy in its next policy meeting on Oct 23 after staying on hold for two consecutive meetings in July and August. The central bank cited the heated real estate market as the main reason for its wait-and-see approach. In particular, the central bank wanted to assess the impact of macroprudential measures taken in late June and early July on real estate prices. However, the central bank's policy stance remains accommodative and 5 out of the 6 members on its monetary policy board expressed a view in August that interest rates will fall over the next 3 months.

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In our view, Bank of Korea is still likely to cut rates two more times in 2025 and bring the policy rate to 2.00% by end-2025, as we expect it to deliver 25bps rate cuts in both October and November. At the same time, we think that the prospects for more rate cuts in 2026 have diminished after the government indicated that it will pursue loose fiscal policy with Budget 2026 and it will narrow only marginally the fiscal deficit in 2026 compared to the second supplementary budget of 2025.

In our view, BOK's easing stance in the rest of 2025 will be also supported by the dovish Fed which is also expected to resume rate cuts in September. Moreover, the prevailing market expectations are that there will be 2 or 3 small rate cuts by the Fed in the rest of 2025, setting a dovish tone for other central banks.

Importance of real estate prices likely to diminish

Real estate prices in Seoul have started to cool down in August and the government has clearly stated that it will implement more real estate market stabilization measures if needed. As there is sufficient time until the October meeting for previously-adopted measures to be fully reflected in real estate prices and the government to implement additional macroprudential measures, if needed, we think that real estate prices will become less of a concern for the central bank.

Overall, we remain optimistic that real estate prices can be controlled with macroprudential measures, and the current rate of real estate price growth will not be an obstacle for rate cuts. To note, apartment prices in Seoul rose by 0.08% w/w in the first week of September, but the central bank cut rates in February and May when apartment prices in Seoul were rising at quicker weekly rates.

Tariff uncertainty could impact policy rate decisions yet again

The uncertainty regarding the implementation of the US-Korea tariff agreement from late July could impact BOK's policy rate decision yet again as the US continues to delay the executive order to lower tariff on South Korean goods. In particular, the two sides remain at odds over the terms of the USD 350bn investment pledge that Korea made to receive the same 15% tariff rate given to Japan and the EU. The Korean government has given signals that it considers unacceptable the investment conditions agreed by Japan, which include a commitment to invest directly into the US the full size of the investment package by the end of Trump's term.

In particular, the Korean government has made it clear that it cannot raise more than USD 20-30bn per year to invest in the US due to FX market limitations. Thus, South Korea is unlikely to reach a final trade agreement with the US in the near future, which will create a tariff gap with competitors in Japan that have already transitioned to lower tariff rates. On the other hand, if South Korea folds and accepts similar conditions as Japan, the repercussions for the local FX market will be significant and could put significant pressure on the won. Either way, BOK is likely to continue to monitor closely the progress on the tariff deal implementation.

Inflation remains subdued, fiscal stimulus boosts private consumption

CPI inflation stood at just 1.7% y/y in August, falling below the 2% central bank target for the first time in 8 months. That said, inflation was impacted by a temporary 50% mobile fee cut by SK Telecom in August due to a hacking incident, and prices could return above 2% in September when the fee cut ends. At the same time, food prices accelerated to 4.9% y/y growth in August, posting the highest increase in 20 months, which continues to exacerbate consumers' inflation perceptions.

On the positive side, private consumption has rebounded due to the consumption coupons included in the second supplementary budget, with retail sales rising by 2.4% y/y July. However, private consumption momentum is likely to dissipate after September when the coupon program expires unless the government approves additional stimulus measures.

Meanwhile, construction output remained a serious drag on growth as it fell steeply yet again by 14.3% y/y in July. Industrial output rose by 5.0% y/y in July as it continued to be propped up by robust semiconductor demand. That said, we expect US tariffs to start impacting external demand more pronouncedly in late 2025. First because of the temporary tariff gap that has opened with Japan, and second because companies will have to start raising prices eventually because they can't continue to internalize tariffs. At the same time, the construction downturn is not expected to be reversed any time soon.

Conclusion

Bank of Korea remains in an easing cycle and is likely to resume rate cutting in October as its concerns about rising real estate are likely to be alleviated by macroprudential measures. In addition, Fed's expected dovishness is also going to strengthen the case for rate cuts.

Even through the economy remains in relatively good shape as of Q3 and private consumption has been propped up by fiscal stimulus, we think that the impact of US tariffs will finally start to impact negatively growth in late 2025, which warrants additional rate cuts by the BOK.

Useful Links

Monetary Policy Decisions

Calendar of MPC meetings

• Next policy meeting: November 6, 2025
• Current policy rate: 2.75%
• Our forecast: Hold
• Last decision: Hold (September 4)
• Rationale: BNM is likely to assess the impact of US tariffs and recent rate cut on the economy, while drawing comfort from resilient domestic demand

In line with market expectations, Bank Negara Malaysia on September 4 left the overnight policy rate unchanged at 2.75%. Compared to July, when the key rate was cut for the first time in five years as a pre-emptive move to support growth, the central bank sounded a bit more optimistic about the country's economic prospects, citing resilient domestic demand and easing global trade uncertainties. The comparatively favourable outlook was reinforced by Malaysia securing a 19% tariff on exports to the US, lower than the 25% previously threatened by President Trump.

BNM may also have wanted to assess the impact of US tariffs and the July 25bps rate cut on the economy before taking further action. Overall, the central bank deemed the current monetary policy stance appropriate and supportive of the economy. This guidance, which was absent from the July monetary policy statement, suggests that the OPR will likely remain on hold in the near term and supports our view that the July adjustment was a one-off move rather than the start of an easing cycle.

That said, another rate cut in 2026 cannot be ruled out if the growth outlook deteriorates. With inflation in check and the ringgit strengthening, BNM has sufficient policy space to deliver another rate cut should conditions warrant.

GDP growth

BNM stated that Malaysia's GDP is on track to expand between 4.0% and 4.8% in 2025 - a forecast that was revised down in July from 4.5%-5.5% to reflect the negative impact of US tariffs on the economy. In the first half, growth clocked in at 4.4%, underpinned by sustained consumer spending and investment activity, highlighting solid domestic fundamentals.

Domestic demand is expected to remain a key growth driver in 2026 amid lower borrowing cost, favourable labour market conditions, and continued high realization of approved investments. In addition, strong overseas demand for electrical and electronics goods, which account for nearly one-fifth of total manufacturing output, together with robust tourism activity could further lift growth prospects. While exports have stayed resilient so far, rising 4.3% y/y during Jan-Jul despite weaker oil and gas shipments, US tariffs, including a potential levy on semiconductors, pose a significant downside risk to the outlook.

That said, Malaysia's export competitiveness may remain largely intact, given that other major export-oriented ASEAN countries generally face similar tariff rates. Moreover, the government has expressed confidence that most of Malaysia's semiconductor exports to the US will be shielded from the Trump's proposed 100% tariff on imported chips. Last month, Investment, Trade and Industry Minister Zafrul Abdul Aziz told the parliament that 65% of Malaysia's semiconductor exports to the US originate from US companies operating in Malaysia, allowing them to qualify for tariff exemption.

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Inflation environment

Price pressures remain subdued, with CPI inflation rising 1.2% y/y in July, edging up from over four-year low of 1.1% y/y in June. During Jan-Jul, the headline figure averaged 1.4%, down from 1.8% in the same period last year. As a result, BNM in July lowered its inflation forecast to 1.5%-2.3% in 2025, down from the earlier projection of 2.0%-3.5%.

The central bank continues to have benign outlook for inflation, noting that both headline and core inflation (averaging 1.9% in Jan-Jul 2025, up from 1.8% in Jan-Jul 2024) are likely to remain moderate this year and in 2026 due to contained global cost conditions and absence of excessive demand pressures. It reiterated that domestic policy reforms - both announced and upcoming, such as SST expansion and rationalization of RON95 petrol subsidy - are likely to have limited impact on inflation in the current environment.

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Exchange rate

BNM did not provide any commentary on Malaysia's exchange rate in its latest monetary policy statement - an unusual omission, though the reason remains unclear. Nevertheless, the central bank is likely taking comfort from the strengthening of ringgit, which has appreciated by 6% against the US dollar so far this year, partly supported by foreign inflows into the bond market.

The country's external position continues to improve, with international reserves rising to USD 122.7bn as of end-August - the highest since Nov. 2014. This gives BNM greater capacity to curb exchange rate volatility if necessary.

Conclusion

All in all, we expect BNM to maintain the OPR in the near term, provided growth remains within the central bank's forecast range and inflation stays under control. The central bank is likely to adopt a wait-and-see approach for an extended period to assess the impact of the recent rate cut as well as the earlier 100bps reduction in the statutory reserve requirement (SRR) ratio in May, which brought it down to a 14-year low of 1%. The SRR cut is expected to inject around MYR 19bn in liquidity into the banking system.

Further Readings

Previous OPR decisions

Meeting schedule

BNM annual report

• Next MPC meeting: Oct 8, 2025
• Current policy rate: 6.50%
• EmergingMarketWatch forecast: Hold

Rationale: Romania's central bank will very likely maintain the key policy rate at 6.50% in the Oct 8 MPC meeting and will very probably make no changes by the end of the year as well due to the high inflation that spiked in July to much-higher than expected 7.8% and is expected to continue gaining speed in the following months, as suggested by NBR governor Mugur Isarescu at the presentation of the August Inflation Report. The NBR assessed in its press release announcing the policy rate-hold decision on Aug 8 that the government fiscal measures package would exert significant pressure on inflation in Q3. Apart from that, food inflation has been on an upward trend too, but that might ease with the stabilisation of the RON rate after the government committed reforms to reduce the fiscal gap, we think.

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The high inflation is not expected to result in a rate hike either, Isarescu assured, adding that monetary policy was partly aimed at avoiding recession risks. He said that there were risks for a recession mainly due to external factors because of the export-dependency of the industrial sector, to which massive reduction in consumption is to contribute too. Acceleration of the EU funds absorption might offset those and the country might avoid a recession, however, the governor added. Isarescu said that economic growth might linger in the 0-1% range in the next year, according to his estimates.

Inflation was higher than expectations in August, speeding up to 9.85% in the month from 7.84% y/y in July. Part of the jump was due to the removing of the electricity price caps, which impact turned out to be somewhat higher (2.2pps) than the one expected by the NBR (2.0pps), while the VAT rate hike to 21% from 19% contributed as well. Developments were in line with NBR estimations, which pointed to 1.6pps contribution from the VAT rate hike and 0.4pps from higher excises. Moreover, the central banks see inflation to likely remain above 9% at the end of this year after peaking in September, NBR governor Isarescu said, meaning that the inflation forecast of the NBR for 8.8% y/y at the end of 2025 is already outdated as it did not include the July and August prints.

The fiscal consolidation measures are going to have a containing effect on private consumption and inflation will start falling gradually already at the start of 2026 and more visibly as of Q3 2026 after the higher base enters the calculations, according to the NBR. Thus, inflation will enter the target at the end of 2026 and will continue slowing down to 2.7% y/y in Q2 2027 as the fiscal consolidation measures are to assist in stabilising the country's economy. Thus, a rate cut for pushing up economic growth does not appear likely in the near future, we think.

• Сurrent policy rate: 18.0%
• Next monetary policy committee meeting: Sep 12
• Expected decision: 200bp сut

With the market consensus split almost equally between a 100bp and a 200bp rate cut on Friday, we find ourselves in the more dovish camp, expecting the regulator to make a larger cut ahead of October. By the time of the October meeting, the CBR will have fresh fiscal projections and an updated economic outlook for next year. Based on recent data and official comments, the slowdown of the economy is running ahead of budget capacity, with the high policy rate seen as the key factor. Thus, the regulator might need to act at the fastest possible pace for now. There is still a significant chance of the key rate being cut to 14% by year-end, with the CBR taking a pause in October, but not this time. Until now, the central bank has moved with gradual cuts and cautious projections, and we believe easing decisions remain uncomfortable for it. That is unsurprising, given that previous easing cycles often ended in renewed inflation. And despite that, this time the situation suggest easing the policy.

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One big argument for a larger cut is the inflation trend. The CBR expected inflation to fall to 8.5% y/y at the end of Q3, but this level was already reached in July, with seasonal disinflation arriving earlier than last year. As of Sep 1, CPI inflation stood at 8.3% y/y, meaning seasonally adjusted inflation in August is to remain below target at 8.3-8.4% (we are to see the data on Wednesday). While this improvement enables a bigger cut at the upcoming meeting, inflation could still exceed 7% by year-end, the ceiling of the CBR forecast range, once seasonal effects fade and the strong ruble loses impact. Which we think supports the idea of a larger cut this time and a possible hold in October.

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Another argument for easing is bank lending. Corporate lending grew by 10.2% y/y in July, the weakest in two years. While August data is not yet published, we expect the trend to remain largely unchanged. Household lending decelerated further to 3.3% y/y, the lowest since the invasion of Ukraine. That reflects not only savings activity, but also falling demand. The CBR has long ago admitted that the policy rate has less direct influence on lending due to high incomes and subsidized programs. Still, it affects consumer behavior, which matters as budget spending is reportedly to be cut. As for the corporate segment, which was a triggering indicator, much longer than the consumer one, we believe rate cuts can now decelerate demand in the short term, as companies see CBR follows its own projections of 2025 key rate, so there are more cuts ahead.

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Negative signals come from the real sector, which is building pressure on the CBR to accelerate rate cuts. GDP growth slowed to 0.4% y/y in July vs. 1.1% in Q2 and 1.4% in Q1. The FinMin cut the annual growth outlook to 1.5% from 2.5%, while industry growth slowed to 0.7% y/y, supported mainly by manufacturing on the back of defense-related output. Retail sales growth remains muted at 2% y/y, though it accelerated slightly as real wages continue to grow on the back of labour shortages. Real wages were up by 5.1% y/y in June, the highest since January, while nominal wages climbed above the RUB 100,000 mark for the first time (outside of December when wages are much higher due to bonus payments). The unemployment rate dipped to a new record-low level of 2.2% back in May and has stayed there, while Putin publicly spoke about the growth of shadow employment. PMI and BCI surveys show stronger labor demand, which could put more pressure. The economy is certainly cooling, raising concerns about whether this slowdown is manageable. CBR faces a choice between lowering rates to support investment and lending, or risking labor market strain.

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Inflation expectations data are somewhat mixed. On the one hand, we saw household inflation expectations rising to 13.5% y/y in August, but the level generally stays elevated this year. It was likely caused by the one-time effect of the first higher utility bills received after the tariff indexation in July, and with a temporary lag, seasonal price increases for vegetables and fruits will provide additional momentum by the year-end. The BCI survey suggests some improvement in the situation, while the PMI survey remains mixed, as service and manufacturing segments had different attitudes in price policy. We expect the CBR not to pay too much attention to inflation expectations this Friday.

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External political and economic factors also favor a cut. Despite the regulator's cautious policy of keeping the ruble strong in order to curb import price growth, current oil price dynamics suggest that additional support for exports is important at this stage. Thus, a rate cut could weaken the ruble, which would be beneficial for the budget. The current state of the diplomatic peace negotiations with Ukraine is also causing increasing concern, and the CBR should want to relieve the real sector of excessive barriers in the form of an 18% rate.

Next MPC announcement: September 18, 2025

Current policy rate: 7.0%

EmergingMarketWatch forecast: 7.0%

We maintain our interest rate call for the next MPC meeting at a hold, keeping the repo rate at 7.0%. While the July decision to cut by 25bps was in line with expectations, the SARB's latest guidance suggests that further easing is unlikely in the near term. The SARBS's policy focus has shifted toward achieving inflation at the bottom of the 3-6% target band, effectively anchoring at 3% instead of the previous 4.5%, without undermining credibility or fuelling exchange rate volatility.

Inflation and growth outlook

CPI inflation accelerated to 3.0% y/y in June, with core inflation at 2.9% y/y, placing both measures at the bottom of the SARB's 3-6% target range. The still low print was supported by a stronger rand and subdued goods price pressures, although food inflation edged higher, driven mainly by rising meat prices, and the decline in fuel costs slowed compared to earlier months. While the current readings support the SARB's shift toward a 3% inflation anchor, the bank expects and acceleration in the second half of the year driven by base effects, food price pressures and slower declines in fuel costs. We forecast July CPI at 3.3% and expect stability in August. Achieving and sustaining the new 3% anchor will be challenging given persistent structural cost pressures, including public-sector wage increases and above-CPI electricity tariffs.

On the growth side, Q2 GDP is likely to surprise on the upside after stronger-than-expected mining and manufacturing output in June. Industry alone could add 0.3-0.4 percentage points to headline GDP growth, while agriculture is expected to perform well on the back of the maize harvest and a forecasted rebound from last year's drought. This could be partially countered by the meat industry which has been hit by disease in the second quarter. The latest data published by the stats office also suggest that even with retail sales slowing in June, the sector should still make a positive contribution to Q2 GDP. Nevertheless, underlying growth remains weak, and the SARB has cut its medium-term growth forecasts to only 0.9% this year and 1.3% in 2026, though still forecasting an acceleration to 2.0% in 2027.

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Global and domestic risks

Tariff risks have now materialised, with the imposition of higher US import charges on South African goods weighing on the rand. However, local asset performance has so far held up reasonably well, aided by broad dollar weakness. The SARB continues to flag global uncertainty as a key risk factor, noting that permanently higher tariffs or renewed geopolitical tensions could disrupt global trade and capital flows. The extended hold in US interest rates is also a headwind for emerging market assets, including South Africa.

Policy implications

Given the SARB's commitment to the new 3% inflation anchor, the recent rand volatility, the likelihood of rising inflation in H2, and persistent external risks, we believe the MPC will prefer to pause at 7.0% in September. While the real policy rate remains high, the Bank appears willing to maintain a restrictive stance until the inflation outlook is more firmly anchored at its new objective.

Monetary Policy Committee Statement

Monetary Policy Committee Forecasts and Assumptions

Monetary Policy Review

• Next policy meeting: Sep 24, 2025
• Overnight policy rate (OPR): 7.75%
• Previous decision: Hold (Jul 23, 2025)
• Rationale: The Central Bank of Sri Lanka (CBSL) is expected to hold key rate to assess the recent shift from prolonged deflation to positive inflation, while monitoring policy transmission amid resilient domestic demand and global uncertainties

At its July 23 meeting, the CBSL held the Overnight Policy Rate (OPR) steady at 7.75%, following a 25bp cut in May. The Monetary Policy Board views this stance as consistent with guiding inflation toward its 5% medium-term target, allowing time for previous monetary easing to fully impact credit markets. The hold marks a shift from active easing to a data-driven pause as CBSL balances recovering demand with persistent global and domestic risks.

The symmetric corridor is still in place, with the Standing Deposit Facility Rate (SDFR) at 7.25% and the Standing Lending Facility Rate (SLFR) at 8.25%, as per the revised monetary policy framework introduced in Nov 2024.

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Inflationary Landscape

Deflation pressures have reversed, with inflation turning mildly positive. The Colombo Consumer Price Index (CPI) recorded a y/y increase of 1.2% in August, up from a 0.3% decline in July, ending eleven consecutive months of deflation. Key drivers include faster price growth in food and non-alcoholic beverages (2.0%), clothing and footwear (4.5%), alcoholic beverages and tobacco (4.4%), education (5.7%), and a rebound in housing and utilities prices (0.5%). Core inflation rose to 2.0% y/y in August, up from 1.6% in July, indicating that demand-side price pressures are gradually emerging.

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CBSL projects inflation will continue rising, trending toward its 5% medium-term target by 2026, supported by recent tariff increases such as the 15% hike in electricity rates implemented in mid-June. The central bank's pause reflects caution to let recent rate cuts influence the economy fully and to avoid premature easing amid a fragile inflation recovery.

Growth Dynamics

Sri Lanka's economy expanded 4.9% y/y in Q2, up slightly from 4.8% y/y in Q1 2025. The quarterly performance was supported by robust industrial activity, steady growth in services, and a modest contribution from agriculture. The industry sector grew 5.8% y/y, marking its strongest quarterly performance in over a year. Construction activity expanded by 8.5% y/y, while manufacturing grew by 3.7% y/y.

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Forward-looking indicators are mixed, with PMI showing strong growth, but slowing tourist arrivals could be a concern in Q3 and Q4. Robust private credit growth supported by easing lending rates and ample liquidity continues to bolster consumption and investment. CBSL expects this trend to drive recovery in the second half of 2025.

External Sector

Despite a rising trade deficit, Sri Lanka's external accounts remain resilient. The country posted a current account surplus of USD 244mn in July 2025, lifting the Jan-May cumulative surplus to USD 1.74bn. Worker remittances exceeded USD 680mn in August and have stayed above USD 600 million for six consecutive months. Tourism receipts surpassed USD 2bn in the same period.

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Gross official reserves remained strong at approximately USD 6.1bn as of end-July, buoyed by steady CBSL FX interventions and the timely release of the fifth IMF-EFF tranche in early July. The Sri Lankan rupee has seen slight depreciation YTD, but reserves provide a solid buffer against external shocks.

Outlook

CBSL maintains a wait-and-see stance, pausing to evaluate inflation recovery, credit transmission, and external risks before considering further rate adjustments. The May rate cut continues working through the system, with lending rates and yields adjusting downward and credit growth gaining traction. The policy rate is expected to remain unchanged through Q4 2025 unless inflation picks up sharply or external vulnerabilities worsen.

CBSL will remain vigilant about global energy prices, trade developments, particularly including those linked to the US-Kenya tariff deal (and the impact on its textile sector), and financial market volatility in shaping its policy path. The current monetary stance aims to anchor inflation expectations without undermining the economic recovery.

Further Reading

Monetary Policy Review, July 2025

Monetary Policy Review, May 2025

Monetary Policy Review, March 2025

• Next MPC meeting: Oct 8
• Current policy rate: 1.50%
• Previous meeting (Aug 13): Cut by 25bps
• EmergingMarketWatch forecast: 25bps cut or freeze
• Rationale: BOT to monitor economic data to determine need for further cuts

The Bank of Thailand (BOT) is likely to do one more rate cut until the end of 2025 after cutting rates 3 times so far in 2025, in our view. However, the timing of the rate cut remains uncertain as it could arrive in either the October or the December meeting. The economic data released until Oct 8 is thus going to be decisive for BOT's decision on the policy rate.

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The BOT is bracing for a major leadership transition as Vitai Ratanakorn will be take office as the new governor replacing outgoing governor Sethaput Suthiwartnarueput. Vitai is known as a big proponent of interest rate cuts compared to his hawkish predecessor Sethaput Suthiwartnarueput. At the same time, inflation remains subdued as consumer prices fell for the fourth consecutive month in July, paving the way for more rate interest rate cuts.

At the same time, Deputy BOT governor Piti Disyatat said in a Bloomberg interview on Aug 20 that cutting more rates in 2025 would require "significant material deterioration" in the economic growth outlook. Piti underlined that the current 1.5% interest rate level remains very low in historical perspective as the policy rate has been below 1.5% in only three occasions over the past 25 years. At the same time, he cast doubts whether more easing will help to revive growth as he stated that much of the slowdown in economic growth is due to structural factors.

Thus, Vitai's dovish views on monetary policy are likely to clash with the current prevailing view in BOT's MPC that more rate cuts are not urgently needed. It should be noted that together with the new BOT governor Vitai Ratanakorn, a new deputy governor and a new external member will be also present at the next meeting. However, Piti Disyatat said that he expects policy continuity as long as the economy "develops as we predict."

Looking at recent economic data, the economy expanded by 2.8% y/y in Q2 on the back of the very strong performance of exports. However, economic sentiment remains weak as the Thailand Industry Sentiment Index (TISI) fell to the lowest level in 3 years in July. In addition, private consumption remains subdued due to the lackluster growth in foreign tourist arrivals.

Overall, we think that economic conditions warrant one more rate cut in 2025, but we don't think that the BOT will be too aggressive and bring the policy rate to 1% or below. That said, both political risks and economic risks remain high and the BOT could find itself in a spot in which it is forced to loosen policy even further. For instance, a potential government collapse after the Constitutional Court's ruling on PM Paetongtarn's ethical breach case could worsen economic sentiment and force the BOT to act.

Useful links

MPC meetings

MPC members

• Current rate: 15.5%
• Next rate decision: Oct 23
• Our forecast: Cut by 50bps

The board of the central bank (NBU) on Sep 11 decided to keep the key rate on hold at 15.5%. This was the fourth on-hold decision in a row, and it was expected. The NBU said that the headline CPI disinflation - down to 13.2% in August from 14.1% y/y in July - was faster than anticipated, while core inflation decline - down to 11.4% from 11.7%, respectively - was in line with expectations. Among the factors behind disinflation this past summer, the NBU listed a new harvest, labour market stabilisation, better inflation expectations, and sufficient external financial assistance so far this year.

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The NBU expects that disinflation is likely to continue this year. This means that easing is likely. At the same time, Russia's war remains the main risk to inflation, given the increasing defence spending and uncertainty over what direction the war might take. The NBU signalled that it could revise its plan to start an easing cycle at end-2025, if the war situation deteriorated. The next MPC meeting is scheduled for Oct 23. As things stand now, the NBU is likely to cut the main rate by 50bps to 15.0% by end-2025, in line with its summer projection.