• 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: Jan 29, 2025
• Current policy rate: 12.25%
• EmergingMarketWatch forecast: 100-bp hike (to 13.25%)

The BCB's Monetary Policy Committee (Copom) adopted Tues. a more hawkish tone in the minutes for its last meeting of the year on Dec 10-11, aligning with its hawkish decision to raise the Selic rate by 100bps to 12.25%. According to the committee, the realization of upside inflation risks has made the outlook less uncertain but more adverse, demanding a stronger monetary policy response. The Copom assessed that short- and medium-term inflationary pressures make the convergence of inflation to its target even more challenging. Moreover, the reduction of uncertainty allowed the committee to resume guidance for future decisions, thereby signaling its expectation to raise the Selic by 100bps at each of the next two policy meetings, bringing the key rate to 14.25% by end-March 2025.

In addition to robust economic data, such as economic activity and the labor market, which support aggregate demand and widen the already positive output gap, the Copom noted that the recent unveiling of the fiscal package caused an additional de-anchoring of inflation expectations. It thus raised its inflation forecasts for all future years. The package's reception among economic agents also negatively impacted the country's risk premium and the exchange rate, with the latter depreciating to hit new record lows even as Congress is to work on approving the package this week, its final legislative one this year. The Copom stressed the necessity of "maintaining unobstructed monetary policy channels, free from counteracting elements, to ensure policy effectiveness and efficiency." It also emphasized the need for continued fiscal efforts to re-anchor agents' expectations, affirming that a reduction in these efforts could force an increase in the neutral interest rate, reduce monetary policy effectiveness, and raise the cost of disinflation. This marked the first time the Copom suggested the possibility of fiscal dominance since the beginning of the monetary tightening cycle.

After dropping guidance in May 2024, the reduction of uncertainty enabled the Copom to resume guidance at the December sitting, it said. Given the additional de-anchoring of inflation expectations, higher inflation projections, stronger-than-expected economic activity, and a larger output gap, the Copom indicated it will raise the Selic by 100bps each at the next meeting on Jan 28-29 and then the following one on Mar 18-19. Thus, expectations point to the Selic reaching 14.25% by the end of March sitting. Despite signaling upcoming decisions, the Copom did not indicate whether this would mark the end of the tightening cycle. Following the release of the Copom's minutes, economic agents' estimates for the terminal rate of the cycle increased to 16.00%, up from a previous projection of 15.00%.

Overall, the Copom's 1-pp hike brought to 175bps the scale of tightening since September, when the monetary tightening cycle resumed after a four-month pause in what had been an easing cycle. The Copom's tougher stance was a response to the negative effects of perceived fiscal irresponsibility and the government's inability to implement structural spending cuts. Adding to this is the potential 'watering down' of the fiscal package under discussion in Congress, despite pleas from President Lula da Silva and Finance Minister Fernando Haddad to avoid doing so. The BCB's monetary policy approach in early 2025 is expected to reflect the fiscal policy's effects on price pressures. Increasingly, there is pressure on the government to present new spending cut measures, but the window for such initiatives appears to be shrinking as the 2026 elections draw closer. However, the deterioration of economic indicators, such as inflation and the devaluation of the Brazilian real, also poses a risk to the left wing's prospects in the next presidential election. This factor will weigh on the government's fiscal policy decisions in 2025, the last viable year to effectively cut expenditures, as no effort towards consolidation will be taken in an election year. It remains uncertain how the political wing of the government will balance these opposing forces and what the effects will be on monetary policy.

• Next MPC meeting: Dec 19, 2024
• Current policy rate: 4%
• EmergingMarketWatch forecast: Hold

Rationale: The 25bp cut delivered in November is likely the last one to be seen in 2024, given rising inflation pressure and still sticky service price inflation. The tone of the CNB board turned more hawkish again, and recent data has supported a more cautious stance. While the economy has been recovering at a much softer pace than previously anticipated, concerns about inflation being elevated will likely prevail at the final MPC meeting in 2024. Eva Zamrazilova already voted for a pause in November, and she communicated this was an option before the MPC meeting. Regarding the rest, the rationale was that monetary policy was still restrictive, and we have reasons to believe that, given that real interest rates are still positive, though at their softest level since the beginning of 2024.

Meanwhile, it was Tomas Holub who voted for a 50bp cut, which means his vote is not relevant for monetary policy in the long term. The reason for that is his departure from the CNB board at the end of November, as he chose not to seek a second term on the board. Holub was replaced by Jakub Seidler, the chief economist of the Czech Bank Association (CBA), who has similar monetary policy views. Yet, even Seidler has been speaking about how inflation has had some sticky elements lately, which implies he may not be willing to push for a rate cut in December.

The minutes from the MPC meeting in November confirm our impressions, as there was clearly an emphasis on price stability over economic growth. Sticky service price inflation was outlined as an upside risk, and several board members expressed doubts that volatile prices will provide enough correction to underlying price pressure. There were also concerns about a weak CZK, which could exert pressure through import prices. Some board members suggested that a new external price shock could unlock a second inflation wave. There were plenty of remarks of how the outlook for core inflation, which excludes regulated and volatile prices, still put it above the 2% target, at 2.5% in both 2024 and 2025. Moreover, the latest staff forecast now sees headline inflation converging to the target in early 2026, rather than in H1 2025. The emphasis on price stability over growth has continued throughout early December, with remarks coming mostly from CNB governor Ales Michl.

Regarding available data, the October and November CPI prints were almost entirely in line with the CNB forecast this time. The forecasting model was revised yet again, accounting for a higher impact of food prices, and thus far, this has paid off, and it even overestimated food price growth in November. Yet, it also means that inflation will remain elevated, and likely above the upper end of the CNB's tolerance band (2%+/-1pp) in December 2024. Regulated prices will be the factor driving inflation in late 2024, mostly due to a base effect, and food prices will take over in early 2025, maintaining the headline print high. There are still expectations that agricultural producer prices will renew pressure on food prices soon. Meanwhile, core inflation has remained elevated as well, indicating that underlying inflation pressure is still high. CNB governor Ales Michl said outright that core inflation should be slightly below 2% before the CNB can guarantee that the inflation target will be met, and this will not happen soon. Service price growth remaining above 5% has only supported that stance, given how service prices are a major component of core inflation. Wage data provided one more argument in favour of elevated inflation, as wage growth turned out to be stronger than anticipated by the CNB, and pressure is coming exclusively from services.

While Michl has been pounding on a hawkish message for some time, he appears to be joined by several other board members. Eva Zamrazilova, Karina Kubelkova, and Jan Kubicek did not rule out a pause in the monetary easing cycle in December. While Kubelkova was not that firmly in favour of a pause, she could not rule it out. Meanwhile, Zamrazilova already voted in favour of holding rates in November, and she is likely to repeat that move in December. On the other hand, Kubicek not only allowed for a pause in December, but also in February. He even suggested that the CNB board may start debating whether to end the current easing cycle when the policy rate reaches 3.50%, i.e. allowing for only two more 25bp cuts.

Given that premise, we just don't see how the CNB board can support another cut in December. While core inflation is not expected to pick up much more, the headline print will remain high, which will likely tie the hands of the CNB board. Furthermore, we expect that the board's hawkish stance will carry over to 2025, and we now expect no more than two 25bp cuts in H1 2025. We may see a 25bp cut next February, but only if inflation is in line with the forecast and economic recovery is still weaker than anticipated. The cut could be pushed to March in case data is not supportive of easing inflation pressure. In general, we anticipate one 25bp cut in each of Q1 and Q2 2025, after which the easing cycle will likely pause, at least until the end of 2025.

We don't completely rule out a third 25bp cut in 2025, but if it happens, it will be likely in Q4 2025, provided that the dust has settled by then. Given how geopolitical risks have remained high, we don't have that in our base scenario. For example, broad trade tariffs introduced by the Trump administration will be one such external shock that may keep underlying inflation pressure elevated throughout 2025. We have been seeing assumptions that tariffs can be introduced in late 2025 at the earliest, but we consider such a scenario as too optimistic. Trump means business this time, and he is forming a cabinet of loyal people, so we expect to see a major policy shift sooner, rather than later. We don't believe Europe is prepared for this, and an open economy like the Czech one is particularly exposed to such price shocks.

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Further Reading:

CNB board statement from latest MPC meeting, Nov 7, 2024

Post-meeting press conference, Nov 7, 2024 (in Czech)

Q&A after the latest MPC meeting, Nov 7, 2024

Minutes from the latest MPC meeting, Nov 7, 2024

Monetary Policy Report, November 2024

Macroeconomic forecast, November 2024

Meeting with analysts, Nov 8, 2024

CNB board profile

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

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

• Next MPC meeting: Dec 26, 2024
• Current policy rate: 27.75%
• EmergingMarketWatch forecast: 27.75%

The MPC will hold a regular rate-setting meeting on Dec 26, and we believe the committee will hold the rates again. While inflation came significantly better than expected in November, despite the fuel and tobacco price hikes, we think the MPC will take into account the recent weakening of the pound against the USD and will maintain its current stance. The MPC said last month that the gradual unwinding of food inflation along with the improvement of inflation expectations since the start of 2024 suggest that inflation remains on a downward trajectory, albeit restrained by the drag of fiscal measures. The MPC expects inflation to remain near current levels until end-2024 but sees a significant easing in H1 2025 due to monetary policy tightening and favourable base effects. The MPC, however, noted that the persistence of regional tensions, elevated international commodity prices, and higher than anticipated pass-through of fiscal measures pose risks to disinflation path.

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The MPC has delivered a massive 19pps interest rate increase and 400bps increase in the required reserve ratio since March 2022, but consumer inflation remains broad-based, reflecting FX pass-through, surging food prices, supply line disruptions, and robust monetary expansion. Most analysts believe the MPC will begin a monetary easing cycle in Q1 2025, but taking into account Egypt's increased reliance on portfolio inflows, we expect the MPC will begin with relatively mild cuts.

Monetary Policy Committee Statement

Monetary Policy Review

Monetary Policy Committee Meeting Schedule

• Next MPC meeting: Jan 28, 2025
• Current policy rate: 6.50%
• EmergingMarketWatch forecast: Hold
• Rationale: MPC remains concerned with weak forint, financial market volatility

The MPC kept the policy rate on hold at 6.50% on its latest rate-setting meeting in December and expressed readiness to maintain the rate at this level for a prolonged period of time. The policy guidance from the meeting confirmed that a pause in the rate cuts was warranted due to volatile financial markets and upside risks to the inflation outlook warranted a pause to the rate cut cycle. The guidance remained almost unchanged compared to the previous meeting in November. There was an interesting change in the wording, in that the MPC omitted its reference to data-driven approach in the monetary policy setting. We think the MPC usually uses this wording to signify that decisions will be taken on a month-by-month basis, so leaving this part out of its statement likely suggested that the MPC does not see chances for rate cuts in the next few months at least. The length of time, in which the policy rate will be kept on hold, depended on incoming information, NBH deputy governor Barnabas Virag said in his usual background presentation after the December meeting. The MPC will react only to a sustained change in the inflation outlook, he said, adding that uncertainty behind some of the factors behind the more conservative monetary policy stance - geopolitical and trade policy prospects, could be resolved in Q1/2025. The overall implications could be that a rate cut should not be expected earlier than Mar 2025, in our view.

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Inflation has generally continued to be relatively favourable compared to NBH expectations, but we think the picture was not straightforward. In particular, the updated macroeconomic forecasts of the NBH showed a deterioration of the inflation outlook for 2025. The NBH raised its inflation forecast for next year and signalled that the 3.0% mid-term inflation target will be achieved in 2026, later than previously expected. The upward revision of the inflation projection for next year was on account of the weaker forint, the NBH implied, and we think government hikes of excise taxes also contributed to the higher inflation outlook. In addition, inflation expectations have increased in the past few months, which the MPC noted on its December rate-setting meeting and highlighted that disciplined monetary policy and anchoring of inflation expectations were necessary for achieving price stability. Consequently, we think that the inflation situation was also non-supportive of further monetary policy easing in the short term.

The MPC has kept its usual monetary policy statements, including that the policy rate will be set based on a careful and patient approach. It also reiterated its commitment towards maintaining a positive real interest rate, in our opinion being generally satisfied with the current real policy rate of around 3%. The current inflation outlook for some mild pick-up of inflation and for disinflation to start in Q1/2025 should also mean that rate cuts are not likely earlier than Mar 2025, in our view.

The voting pattern of the MPC was the same in November and December. All MPC members voted to keep the policy rate on hold with the exception of one member, who supported a 25bps rate cut. The November meeting minutes showed that NBH deputy governor Mihaly Patai had been in favour of a rate cut and we think that he maintained his voting stance in December. Patai's mandate is due to expire in Oct 2025 and we expect that he will not be re-appointed. Finance minister Mihaly Varga, nominated to take up the post of NBH governor as of Mar 2025, has presented his team of three members, which we expect to be appointed for deputy governors in due time and Patai was not on the team. Varga's team included state secretary of the finance ministry Peter Beno-Banai, head of the State Debt Management Agency (AKK) Zoltan Kurali and head of the state-owned development bank MFB Levente Sipos-Tompa.

Post-meeting MPC statement from December rate-setting meeting

Presentation of Barnabas Virag on press conference after December MPC meeting

Minutes from November rate-setting meeting

Latest Inflation Report - Q3/2024

MPC meeting calendar 2024, 2025

• Next Policy Meeting: February 5-7
• Current Policy Rate: 6.5%
• Last Decision: Hold (October 9, 2024)
• Our Forecast: Cut
• Rationale: With expectations of inflation easing in the coming months and the growing call for a rate cut to support growth, the RBI will likely cut its rate by 25bps

At its December 6 meeting, the Reserve Bank of India's Monetary Policy Committee (MPC) voted to maintain the benchmark repo rate at 6.5%, alongside holding the standing deposit facility (SDF) rate steady at 6.25% and the marginal standing facility (MSF) rate at 6.75%. Four MPC members voted to maintain the repo rate at 6.50%, while two members preferred a 25bps cut. The committee unanimously supported continuing the neutral monetary stance to achieve inflation targets and bolster growth prospects. This session follows the debut rate decision of the newly appointed external members in October, whose contributions brought a novel dimension to the deliberations. While the RBI had switched its stance to neutral in the meeting paving way for rate cuts in December, this was deferred given the breach of the 6% inflation target in October.

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The Monetary Policy Committee (MPC) reaffirmed its commitment to the medium-term inflation target of 4%, underscoring the need for vigilance in the face of price volatility. Governor Shaktikanta Das flagged geopolitical tensions, fluctuating global oil prices, and domestic food supply disruptions as key risks to the inflation outlook. With October's Consumer Price Index (CPI) inflation climbing to 6.21% y/y, the Reserve Bank of India (RBI) voted to err on the side of caution. However, the recent real GDP data for Q2 revealed strong deceleration in economic activity , which prompted a 50bps cut in the cash reserve ratio to 4%.

Economic Growth

India's economic growth showed considerable deceleration in Q2 FY25, as private consumption eased and public spending uptick was moderate at best. Persistently high inflation has eroded purchasing power among the urban population, which led to moderating demand in the quarter. The downturn was primarily attributed to a weaker performance in the manufacturing sector. The print was less than that predicted by the market as well as the Reserve Bank of India (RBI). the Gross Value Added (GVA) in agriculture grew by 3.5% y/y during the quarter, up from 1.7% in the same period last year and 2% in Q1 FY24, signalling resilience in the sector. Meanwhile, the GVA for manufacturing dropped sharply to 2.2% y/y, compared to a robust 7% in Q1 and 14.3% growth in the previous year, reflecting subdued industrial momentum. With the exception of agriculture, all other sectors recorded a slowdown in activity. The mining sector recorded a contraction of 0.1% y/y, which was primarily on account of limited activity during the monsoon season.

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Recent PMI data also suggests the momentum slowdown continuing in Q3 as well, which will be of concern. Nonetheless, the RBI expects the momentum to pick up in H2 as government steps up spending and private demand revives. The RBI too has become wary of waning economic momentum. The central bank cut its forecast for FY25 to 6.6% y/y from 7.2%y/y given the recent prints and underscoring the slowdown in private consumption in Q2. Slowing car sales in November indicate that urban consumption is declining.

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Inflation

Inflation remains a critical concern. After moderating to 3.5% in July, Consumer Price Index (CPI) inflation surged to 5.5% in September and further to 6.21% in October, exceeding the RBI's upper tolerance threshold. Rising food prices, exacerbated by erratic weather patterns and supply chain disruptions, have been the main driver of this uptick.

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In response, the government has implemented measures such as releasing strategic reserves of wheat, rice, and sugar to stabilise prices. Despite these efforts, external risks-including volatile global oil prices and escalating geopolitical tensions, particularly in the Middle East-pose significant upside risks to inflation. The RBI is expected to remain vigilant, balancing growth objectives with the need to anchor inflation expectations.

The RBI expects CPI inflation to average 4.8% (up from 4.5%) for FY25, but headline inflation may stay elevated in Q4 2024. While the MPC maintains a neutral stance, it is unlikely to pivot toward rate cuts until inflation shows consistent moderation. However, there is hope that the incoming fresh produce will see food prices ease in the coming months. This should see headline inflation decline, allowing sufficient headroom for a rate cut in Q1-2025.

Financial and External Sector

India's banking system remains stable, with credit growth averaging 18.8% y/y in 2024, driven by demand from services, personal loans, and infrastructure projects. Foreign exchange reserves reached a record high of USD 682.1bn as of early November, providing a buffer against external shocks. Despite a widening current account deficit (CAD) to 1.1% of GDP in Q1 FY25, strong remittance inflows and resilient service exports have kept the external position manageable. Foreign portfolio inflows surged, with USD 19.2bn net inflows recorded from June to October, reflecting improved investor sentiment.

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Outlook

The FY25 budget seeks to energize the economy through a blend of tax incentives and significant infrastructure spending. However, these efforts face challenges from persistently high inflation and steep borrowing costs, which continue to dampen consumer and business confidence. At its December policy meeting, the Reserve Bank of India (RBI) cut its cash reserve ratio to boost liquidity in the system while attempting to balance the growth-inflation concern. With inflation expected to trend down and given the slowing economic momentum, the RBI is likely to cut rate in Q1. Another additional factor will be the new RBI governor, Sanjay Malhotra. He is expected to be of dovish bent given his stint at the Ministry of Finance. The government has been suggesting that the RBI should cut rates and it is likely that Malhotra would be of a similar view. This could mean that the doves will dominate the MPC paving way for a rate cut.

• Next policy meeting: TBA (mid-January)
• Current policy rate: 6.00%
• Our forecast: 25bps cut
• Last decision: Hold (Dec 17-18)
• Rationale: Rupiah's stability is the main determinant of monetary policy as inflation remains within the target band

We expect Bank Indonesia to cut the key rate by 25bps in January or February, depending on the rupiah's appreciation, after keeping the key rate flat at 6.00% in the last three MPC meetings. The central bank cut the key rate only once on Sep 18, 2024, after which external geopolitical developments forced it to pause its monetary easing cycle. As a result, another potential rate cut will likely take place in Q1 2025 if the rupiah manages to reverse some losses. We should also note that BI now lags behind the Fed in its monetary easing cycle.

The rupiah's stability is the main factor behind MPC decisions at present, with inflation being a secondary concern as it remains within the target band of 2.5+/-1%. On the positive side, the rupiah gained some ground against the USD in August and early September, but it has since resumed its downward trend due to the rising tension in the Middle East and Trump's win at the US presidential election. The latter has led to the strengthening of the dollar and shifting market expectations towards more gradual easing by the Fed.

However, the Fed has continued with its monetary easing, slashing the Fed funds rate for two successive meetings, while it is also expected to deliver a third 25bp rate cut later today, bringing the Fed funds rate to 4.25-4.50%. This should provide some breathing space for the rupiah, in light of the growing interest rate differential, which should pave the way for BI to follow with a rate cut in the short term.

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GDP growth

GDP growth slowed to 4.95% y/y in Q3, down 5.05% y/y in Q2, which marked the second slowdown in a row. Still, the central bank projects GDP growth at 4.7-5.5% in 2024, up from 4.5-5.3% in 2023. The stronger growth will be driven mainly by domestic demand, with both private consumption and investment set to gain some pace. Overall, domestic demand is by far the main economic growth driver, with consumption in particular contributing to the solid GDP expansion. Looking forward, BI expects GDP growth to accelerate to 4.8-5.6% in 2025.

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

Exchange rate stability

The rupiah depreciated a lot in the first half of the year, losing as much as 5-6% by early July, before reversing the trend in Q3. It did particularly well in August and September, erasing the depreciation fully and in fact gaining 0.4% against the USD by mid-September. However, it resumed its downward trend since the Middle East tension escalated, particularly between Israel, Iran and Lebanon, which led to renewed pressure on EM currencies.

Moreover, Trump's win in the US presidential election led to a surge of the US dollar, which put pressure on all EM currencies. Market expectations for the Fed's monetary polity also shifted towards a more gradual easing, as inflation is expected to remain elevated due to Trump's policy agenda.

In Indonesia, the rupiah's stability has been the main factor behind recent key rate decisions, with its depreciation leading to rate hikes earlier this year, while the latest gains led to a rate cut perhaps sooner than expected. As a result, the BI was also forced to react to the recent depreciation of the local currency, delaying its monetary easing.

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

Inflation environment

CPI inflation slowed to 1.55% y/y in November from 1.71% y/y in October. This was the slowest inflation rate since Jul 2021. The central bank's target range is 2.5+/-1%. On the other hand, core inflation accelerated slightly to 2.26% y/y in November from 2.21% y/y in October.

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

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

Conclusion

Looking forward, we expect BI to remain vigilant regarding further rate cuts, due to the renewed pressure on the rupiah. As a result, the next rate cut could take place in Q1 2025, possibly in January or February, in our view, provided that the rupiah manages to regain some of the recent losses.

The pace of the Fed's monetary easing will also play a key role, as further delays on the Fed's side would inevitably lead to the BI remaining on hold for longer, in our view.

Further reading

Last MPC press release

Calendar of MPC meetings for 2025 - TBA

• Next MPC meeting: December 19
• Current policy rate: 10.25%
• EmergingMarketWatch forecast: 25bps cut

We are confident the CB will be cutting its Monetary Policy Rate (MPR) on Thursday. We see the chances of a 25bps cut above 50%, with at least two board members pondering or backing a 50bps cut. It won't surprise us if the cut comes from a divided board on the magnitude of the cut.

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The market expects a 25bps cut too, per public polls. However, a few analysts expect the CB's dovish side to win the vote, cutting the policy rate by 50bps.

The arguments to cut the rate by 50bps are that core CPI inflation is slowing, and that GDP growth will be low next year, bringing fewer inflationary pressures. This has been the argument of Governor Victoria Rodríguez and Deputy Governor Omar Mejía. This claim gained strength with the November CPI inflation print, when CPI inflation slowed to 4.55% y/y. Indeed, the CPI inflation report was positive, with slowing goods and service prices, pushing core inflation down to 3.58% y/y.

However, we do not see conditions for a 50bps cut. For starters, the November disinflation is only erasing a bump posted in October, with inflation still comfortably above the upper end of the CB's 2.00-4.00% tolerance band and without a clear downward trend. Indeed, core inflation does show a slowing trend, down by 1.92pps y/y by November. However, non-core inflation has erased this improvement, with inflation standing up by 0.13pps y/y. On this, even though the CB is right to focus on core inflation and maintain an easing cycle, moving to faster easing disregards lingering inflationary pressures observed on sticky services prices, up by 4.90% y/y in November, and on agricultural prices, which rose by 10.74% y/y in November.

Lingering political uncertainty goes against faster easing too, in our view. The June 2 general election landslide victory by the ruling MORENA brought worrying constitutional reforms that risk hindering investment ahead and may hurt competitiveness in the country, pressing the currency while damaging the business climate. This was worsened by fears related to the victory of US President-elect Donald Trump, who threats to impose 25% tariffs on Mexican goods until the government curves migration and fentanyl traffic. These factors have brought a sharp currency depreciation since mid-2024. Finally, the government's incapacity to move as fast to fiscal consolidation in 2025 and the decision to raise the minimum wage by 12% next year stand as other risks for the disinflation process ahead.

We are confident two board members will not back faster monetary easing this week, Deputy Governors Irene Espinosa and Jonathan Heath have called for caution in a context of high uncertainty. This makes Deputy Governor Galia Borja the kingmaker. Per our read of the minute, we believe she agreed there is ongoing disinflation but called for a cautious approach, suggesting she'll be supporting a 25bps cut with the majority, in our view. She has sided with the dovish side before and could surprise in the upcoming sitting. However, she has given no clear signs to agree with a 50bps cut and, on the contrary, has showed her concern on sticky service prices which are only now slowing but face the risk of new upward pressure from a 12% increase of the minimum wage.

Beyond year-end, the base scenario is for the CB to cut its policy rate continuously and unanimously. This can certainly be disrupted by a new acceleration of inflation, sticky service prices ahead or financial volatility, which may come in the context of increased uncertainty following the US election.

On the other hand, we expect the CB to become more dovish next year, considering Espinosa's term will end and will not seek a new one. The new member will be the appointed by President Claudia Sheinbaum. We expect her to appoint a professional, considering she has named known professionals at the helm of most positions of her cabinet. In any case, we expect her to pick a dovish board member, tilting the balance, with Borja and Heath remaining as the lone cautious board members.

Only a very surprising pick would maintain the current balance, in our view, considering the departing board member is the most hawkish member of the Monetary Policy Council (MPC).

Overall, we fully expect the CB to cut its policy rate in upcoming sittings. We expect a new 25bps cut in December, bringing the MPR down to 10.00%. We see the chances of a 50bps at about 30% despite still high inflation and loosely anchored expectations. We expect the CB will be cutting its policy rate constantly next year, bringing the policy rate to 8.00% by 2025-end. Financial volatility, in the context of a protectionist policy coming from the US could change our projection, hindering continuous easing ahead. However, the appointment of a more dovish board member to start 2025 could lower our 2025-end MPR projection a bit, considering two board members already see conditions for faster easing in the current context of lingering inflationary risks and uncertainty.

• Next MPC meeting: 25 - 26 November 2024
• Current policy rate: 27.25%
• EmergingMarketWatch forecast: 27.75% - 28.25%

The CBN will hold the final 2024 meeting of the MPC on November 25 and 26. At the September meeting, the MPC raised the monetary policy rate by 50bps to 27.25%, marking the fifth consecutive hike this year. Under the leadership of governor Yemi Cardoso, the CBN has raised the benchmark interest rate by a total of 850bps this year. Cardoso has repeatedly emphasized that the CBN will continue to implement orthodox monetary policies to tackle inflation and stabilize the economy. Data from the National Bureau of Statistics shows that the inflation rate for October stood at 33.88%, up from 32.7% in September. This marks a four-month high, reflecting increasing food prices, higher energy costs, supply chain disruptions in agriculture and continued foreign exchange volatility. Despite the usual boost from the October harvest season, food inflation remains a significant concern, rising to 39.16% in October compared to 37.77% in September. The real policy rate is still negative and the MPC has emphasized the need to turn it positive to boost investment. We believe that the MPC will raise the policy rate at the November meeting due to continued price pressures.

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Nigeria's foreign exchange market remains unstable, according to Fitch Ratings this month in their latest assessment of Nigeria. The global rating agency stated that recent CBN initiatives, including unifying multiple exchange rate windows into a single rate and clearing a significant backlog of foreign exchange obligations, have yet to bring lasting stability to the naira. Fitch raised concerns over the true net reserves, as approximately a quarter of current gross reserves are tied to FX swaps with local banks, adding uncertainty to Nigeria's FX market outlook. Fitch Solutions projects that the naira will depreciate to as low as NGN 1,993 per dollar by 2028. Since June 2023, the naira has depreciated by 70%.

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The Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA) recently criticized the CBN's high interest rates, describing them as a sign of a central banking system disconnected from the needs of businesses. The latest Purchasing Managers' Index report from Stanbic IBTC Bank highlights growing challenges for the Nigerian private sector as inflationary pressures intensify, triggering a contraction in both demand and business activity. Local experts argue that monetary tightening alone cannot resolve Nigeria's structural challenges. Supply bottlenecks, import dependency and poor domestic production remain critical issues. Analysts advocate for a mix of fiscal measures to boost local production, improve security in farming regions and stabilize energy costs. Targeted subsidies and increased social welfare spending have provided short-term relief, but economists warn of prolonged inflation without comprehensive reforms. However, like Cardoso, the other MPC members seem set on maintaining a tight monetary policy. All present MPC members voted for a rate hike in September.

Monetary Policy Committee Statement

Monetary Policy Committee Meeting Schedule

• Next policy meeting: TBA (probably in the last week of Jan 2025)
• Current policy rate: 13.0%
• Last decision: Cut by 200bps (Dec 16)
• Our forecast: Cut by 100-150bps

In a move that was widely anticipated by the market, the State Bank of Pakistan (SBP) on Dec 16 cut the policy rate by 200bps, prompted by a sharp deceleration in inflation. It was the fifth consecutive reduction in the key rate, which has been slashed to 13.0%, from an all-time high of 22.0% in June. A stable external sector, with the current account registering a USD 729mn surplus in November, the second highest in the country's history, also encouraged the central bank to go for yet another aggressive cut. We believe that the SBP now has limited room to further cut the benchmark interest rates and is about to conclude its easing cycle as suggested by its veiled forward guidance. The central bank deemed the current real policy rate "appropriately positive" to keep inflation within its target range of 5%-7%.

Inflation environment

CPI inflation in November eased to 4.9% y/y, the lowest since April 2018, largely due to a decline in food prices amid improved farm output, subdued global oil prices and exchange rate stability. The slowdown was also driven by a favourable base effect, which is likely to keep inflation contained at least until April 2025 when its impact will phase out. The SBP saw inflation maintaining a downtrend over the coming months.

While the November reading was below the lower end of SBP's 5%-7% target range, the central bank said that headline inflation may remain volatile in the near term before stabilizing in the target range, citing sticky core inflation and elevated inflation expectations. Nevertheless, optimism strengthened regarding the inflation outlook in FY25, with the SBP projecting inflation to average substantially below its earlier forecast range of 11.5%-13.5%. During Jul-Nov FY25, inflation was at 7.9% y/y.

At a post-policy analysts briefing, SBP governor Jameel Ahmad said that updated forecasts for inflation, GDP growth and current account will be released in the next policy meeting, the date for which is yet to be announced. The IMF projects inflation at 9.5% in this fiscal year.

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External sector

The external sector has improved considerably over the past year, anchored by back-to-back IMF loan programs and strong policy decisions. The current account has been in surplus since August, posting a USD 729mn surplus in November, the highest in nearly a decade (Feb 2015), led by robust workers' remittances. This has enabled the SBP to build up its foreign exchange reserves by intervening in the interbank market. Bilateral debt rollovers, investment inflows and loans from official sources have also boosted forex reserves, which reached a 22-month high of USD 12.05bn as of Dec 6. SBP governor said that the reserves are likely to exceed USD 13bn by June 2025.

The government is in a comfortable position to service its foreign debt, which amounts to USD 26.1bn in FY25, including USD 22.1bn in principal payments and USD 4bn in interest payments. Of this, USD 10.4bn has already been repaid or rolled over as of December 15, Ahmad said, adding some USD 5bn will be repaid in the remaining period of this fiscal year while expressing confidence that USD 10.7bn loans will be rolled over.

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GDP growth

The SBP assessed economic activity to have gained traction, signalling improved prospects for GDP growth. It said that downside risks to the crop outlook have somewhat subsided while industrial output has picked up, although the latest prints suggest that the manufacturing sector is struggling to recover. The central bank expected GDP growth to be in the upper half of the projected range of 2.5%-3.5% in FY25.

Conclusion

Overall, easing financial conditions will support economic growth besides helping the government reduce its borrowing cost. In an interview with a private TV channel following the policy meeting, Ahmad said that a sharp decline in the policy rate is estimated to save PKR 1.5tn in markup payments this fiscal year, which will allow the government to meet its fiscal deficit target of 5.9%. To remind, interest payments have been budgeted at PKR 9.8tn in FY25.

We believe that the SBP is likely to turn cautious in its monetary policy, given that its needs to pursue a tight stance under the IMF bailout package. The size of the next policy rate cuts is expected to be small. The central bank is likely to bring down the policy rate to 10.0% before calling it a day, in our view.

Further reading

Last MPC decision

• Next monetary policy meeting: Dec 19
• Current policy rate: 6.0%
• EmergingMarketWatch forecast: 25bp cut
• Rationale: Consensus polls; CPI data for November; lower GDP growth forecasts by DBCC, WB

BSP's Monetary Board (MB) will likely reduce the BSP's target reverse repurchase (RRP) rate by 25bps to 5.75% at its meeting on Dec 19. In October, the MB lowered the BSP's target reverse repurchase (RRP) rate by 25bps to 6.0%. This was the second consecutive 25bp cut after the one in August.

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The MB is expected to reduce the policy interest rate by 25bps to 5.75% on Dec 19, according to a Reuters poll conducted from Dec 10-16. All 24 economists in the survey expected such a decision. A strong majority forecast an additional 25bp cut every quarter over the following three quarters, which will bring the rate to 5.00% by end-September 2025.

On a related note, 13 out of 16 analysts in a BusinessWorld poll expected a 25bp cut on Thursday. One respondent expected a reduction by 50bps and two predicted a hold decision. The survey was conducted last week.

BSP Deputy Governor Francisco Dakila Jr. said that after the MB made two consecutive policy rate cuts, the message is that while the general direction remains for easing, the pace has to be considered very carefully. Dakila said that when they launched the easing, they were thinking that the US Fed would lower the key rate by about 100bps in 2025. Currently, the Fed is expected to reduce by only 50bps next year, which the BSP has taken into account in its policy scenarios.

Nonetheless, the Philippine central bank gives priority to domestic data in its policy decisions, the official said. Domestic inflation and how it relates to the target would be the main consideration for monetary policy.

Inflation

CPI inflation increased to 2.5% y/y in November from 2.3% y/y in October, but still remains within the 2.0-4.0% target band. Cumulatively, CPI inflation averaged 3.2% y/y in Jan-Nov. As a result, CPI inflation has been within the BSP's target for the last 12 months, paving the way for further key rate cuts, possibly in a bid to spur the economy. However, we should note that both the pace of the Fed's easing, as well as domestic developments, will weigh on the central bank's decisions in 2025.

Economic growth

The Development Budget Coordination Committee (DBCC) revised in early December the government's GDP growth target for 2024 to 6.0-6.5% from 6.0-7.0% previously. The DBCC noted that the GDP rose by 5.8% y/y in Jan-Sep. Despite domestic challenges, the committee believes that the revised target still can be achieved, because it expects the country's economy to bounce back in Q4 on the back of the anticipated increase in holiday spending, continued disaster recovery efforts, low inflation and a robust labour market.

The DBCC now predicts economic growth in the range of 6.0-8.0% per year over the period 2025-2028. The previous targets were 6.5-7.5% for 2025 and 6.5-8.0% for 2026-2028.

The World Bank forecasts real GDP growth of 5.9% in 2024, 6.1% in 2025 and 6.0% in 2026, according to the December Philippines Economic Update (PEU). In October, the WB projected economic growth of 6.0% this year and 6.1% next year.

The Asian Development Bank has kept its GDP growth projections for the Philippines unchanged at 6.0% this year and 6.2% next year, the ADB said in the December edition of its Asian Development Outlook. Both growth rates are the same as the ones forecasted in April and September.

LFS, loan growth

The unemployment rate was 3.9% in October, up from 3.7% in September, but lower than 4.2% in Oct 2023, according to the results of the latest labour force survey (LFS). In the y/y comparison, the number of unemployed fell by 5.9% to 1.97mn in October. The number of employed rose by 0.8% y/y to 48.16mn. The labour force hence climbed 0.5% y/y to 50.12mn.

Outstanding loans of universal and commercial banks, net of reverse repurchase (RRP) placements with the BSP, rose by 10.6% y/y to PHP 12.50tn at end-October, slowing down from 11.0% y/y growth at end-September. Annual loan growth has been in the double digits for the sixth month in a row.

Exchange rate

The peso is trading at USD/PHP 59.07 at the time of writing, which compares with USD/PHP 57.74 on Oct 16, the date of the previous MB meeting, and USD/PHP 55.388 on Dec 29, 2023.

BSP Governor Eli Remolona said on Nov 27 that the peso could depreciate to a record low of USD/PHP 60. However, the central bank wants a potential exchange rate movement to be orderly and not sudden. The BSP does not want a one-sided market.

The governor said he is comfortable with the current level of the exchange rate and added that the central bank has intervened in the FX market in "small amounts" recently. He said that the day-to-day exchange rate movement is not a factor for monetary policy. For this to happen, the swings must be significant and take place over a few months. The exchange rate was USD/PHP 58.684 on Nov 27 and USD/PHP 55.98 on Sep 30.

Further reading

Press release after October 2024 monetary policy action

Schedule of monetary policy meetings

Highlights of MB meetings on monetary policy

Monetary Policy Report

• Next MPC meeting: Jan 15-16, 2025
• Current policy rate: 5.75%
• EmergingMarketWatch forecast: 5.75%

Rationale: The Monetary Policy Council held rates at its December sitting closed on Wed., but appeared to take a relatively hawkish position as the year prepares to turn. The MPC said in its post-sitting statement that inflation would be "markedly" higher than the target going into 2025, moving from viewing inflation as being "elevated." It also warned that energy prices could rise sharply in H2 2025, though the government has set up power prices to remain relatively muted next year, in our opinion. There is, one supposes, some uncertainty due to the fact the natural gas tariff will be changed for H2 and the capacity fee on power will also return for H2, but the power price itself is not likely to change much.

Still, it is possible the MPC just wanted to signal to market players that it won't be thinking about cuts in early 2025 and will wait till the Mar 11-12 sitting. That sitting will see the inflation projection updated at the same time as the policy horizon will be extended to 2027. This double-move will be key. The November inflation projection already put inflation at the target in 2026. If, say, economic growth slows in 2026 and 2027 due to fiscal consolidation, then that would suggest inflation will slow further in 2027 as well and that could put it in the bottom part of the band around the 2.5% target. That might act as a further fillip to the chances for a rate cut, even if inflation data is not clear.

The lack of clarity for inflation data comes as Statistics Poland (GUS) delays the release of full inflation data in Q1 due to how it updates the inflation basket. This means that for the MPC's Mar 11-12 sitting, at which it is supposed to discuss easing, it will have only partial, preliminary inflation data for January. Though revisions are not usually bigger than +/- 0.2pp, the MPC won't necessarily know where inflation is going to go in Q1. GUS has just released its 2025 calendar and it will release CPI inflation data for January and February on Mar 14, which will also be based on the new inflation basket.

But NBP and MPC chair Adam Glapinski has been saying that the MPC can cut when it is sure inflation is falling and the projection shows a high probability the target will be hit in the medium term. The latter condition is met and should continue to be met through the March and July inflation projections. The question then becomes whether the MPC is serious about seeing inflation peak and come down. If so, then the first cut is not likely until May 2025, for which the council would have April inflation data, which should show a March peak followed by the beginning of the disinflation path that should take inflation to the target by some point in H2 and followed by a move toward the centre of the target as well.

We are trying to base our view on the logic of what MPC members have said, when data will be released, and probabilities for next year. There are of course big unknowns, and these could be decisive for the easing timing. If US President-elect Donald Trump's policies hit hard early, then growth prospects could worsen sharply and that might help a cut come in Poland. There is also the question that the MPC might want to just cut by 25bps in March and see where things go. A quarter-point reduction won't change much, but the MPC can still signal that there has been a change in direction. Yet, in the end, we still expect a rather later cut, which is likely in May if the inflation outlook is good or later if it deteriorates.

Archived video of all MPC press conferences

MPC's post-sitting statements

Latest council minutes

Latest NBP inflation report (November 2024)

Most recent MPC voting results

• Next MPC meeting: Dec 26, 2024
• Current policy rate: 50.0%
• EmergingMarketWatch forecast: Cut by 1.0-2.0pps, conditional on early indicators for December inflation and upcoming adjustment to minimum wages
• Rationale: Anticipated core inflation improvement gives CBT room to cut rates

The CBT is preparing for a limited reduction in its policy rate at the December meeting, potentially between 100bps and 200bps, contingent on preliminary December inflation readings and the magnitude of the upcoming minimum wage increase. This inclination reflects the CBT's assessment that headline figures remain challenging, but underlying core inflation trends are gradually improving. The recent MPC meeting suggested that despite persistent volatility in unprocessed food prices, which are largely driven by supply-side factors, it regarded these price swings as transitory. Core inflation indicators, which strip out items like unprocessed food and administratively set prices that are relatively unresponsive to monetary policy, began to show signs of easing, as evidenced by November's relatively moderate 1.3% m/m increase in inflation excluding food, the CBT emphasised in its evaluation on monthly price developments.

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We think the CBT considers that supply-side shocks, assuming the correct monetary policy stance, should not translate into lasting inflationary pressures. Instead, the CBT placed its attention on core and services inflation, both of which were showing tentative signs of improvement. If December's inflation remains below the 3% m/m threshold, recalling that inflation stood at 2.9% m/m in Dec 2023, headline annual rates could continue on a downward trajectory, reinforcing the CBT's cautious but dovish inclination, in our assessment.

Nevertheless, we think the CBT is clearly factoring in the uncertainty surrounding the upcoming minimum wage adjustment. There have been signals that the increase might not exceed 25%, but we think lingering doubts persist due to recent policy moves, such as backward-looking adjustments in the revaluation rate and deposit insurance guarantees, which were anchored to past inflation rather than forward expectations. This lack of forward-looking clarity on the minimum wage could, in our view, influence the CBT's decision-making process at the Dec 26 meeting. Put differently, if preliminary inflation indicators remain benign, and if the minimum wage hike remains in line with the CBT's assumptions, we think the initiation of a gradual monetary easing cycle could very well begin in late December. Our expectation is reinforced also by recent remarks from CBT governor Fatih Karahan during the Inflation Report meeting, where he stated that initiating an interest rate cut cycle would not compromise the disinflation process or the transition to the lira. However, should incoming wage data deviate meaningfully from expectations, it may prompt a more cautious approach, albeit still guided by the Bank's overarching emphasis on core inflation trends, in our assessment.

Initiating monetary easing at this juncture would be premature, in our assessment, given several key concerns. Since the CBT started raising its policy rate on Mar 22, the currency weakened only by 7.2%, from a basket exchange rate of TRY 33.3 to TRY 35.7, while consumer and producer price indices rose by 24.2% and 14.7% respectively, indicating that inflationary pressures outpace currency depreciation. This, in our view, suggests that early easing could exacerbate inflationary pressures and further weaken the currency. Moreover, despite a declining trend, neither the real sector, households, nor market participants expect inflation to converge to the CBT's end-2025 target of approximately 21%, raising credibility concerns and the risk that inflation expectations may remain unanchored. Under such conditions, prematurely reducing interest rates could unravel recent stabilisation efforts, widen macroeconomic imbalances, increase the country's risk premium, potentially trigger capital outflows, and heighten financial market volatility, in our opinion. Furthermore, the anticipated inflation decline in 2025 is likely to be limited by reduced base effects, making it a more challenging year than 2024. This scenario, in our assessment, underscores the need for the CBT to maintain a prudent, transparent policy stance. Thus, we think front-loaded interest rate cuts could prematurely loosen monetary conditions and undermine the ongoing disinflation process.

Summary of November rate-setting meeting

MPC rate decision in November

Quarterly Inflation Report for Q3

Monetary policy strategy for 2024

• Next meeting: Dec 17
• Current policy rate: 5.25%
• EMW forecast: 5.00%

The BCCh's Monetary Policy Council is expected to cut its benchmark interest rate by 25bps to 5.00% in its next policy sitting scheduled for Dec 17, while signaling that the continuation of cuts in the early part of 2025 is not obvious. A stagnant economy working with a slightly negative output gap and a prolonged negative lending cycle are the two main drivers calling for the MPC to keep cutting the monetary policy rate. On the other hand, inflation sitting above the monetary policy target, persisting REER weakness, and uncertainty about global trade policy are factors that will make the MPC proceed cautiously. It is worth noting that the next policy decision will be informed by the new quarterly monetary policy report, which contains updated forecasts and output gap estimate that will be made public the next day, so there is greater room for a surprise in both the rate decision and the guidance.

Data Download

Economic activity started 2024 surprisingly strong, but the series adjusted for seasonal effects peaked in February and has been 0.6% below that peak on average in Feb-Oct [link]. Although GDP growth in 2024 will be higher than anticipated at the start of the year, activity has been flat for the most part, and that is with copper mining output recovering from a low base. It could be argued that high interest rates and tightening capital requirements are contributing to the economy's moderate performance, since lending activity is going through a down cycle [link] that banks are calling the deepest and more persisting of the last 30 years [link]. Job creation has also stagnated this year, with unemployment still well above pre-pandemic levels [link]. The balance of data on the real economy calls for the continuation of the rate cut process into monetary policy neutrality.

CPI inflation is expected to end the year at 4.8% y/y, above the 3.0% monetary policy target, and it could probably take another step up beyond 5.0% y/y in the early months of 2025. An ongoing hike of electricity tariffs following a five-year freeze explains a full point of the 4.8% y/y inflation rate, but the final adjustment is expected in Q1. If we exclude electricity, we can see that the disinflation process remained generally well behaved, but core inflation is back up above 4.0% y/y after sitting at 3.2%-3.5% in the early part of the year. With core inflation only slightly above target and a negative output gap, current inflation dynamics on their own shouldn't deter the MPC from continuing to cut.

Global developments are tilting the balance of risks on inflation to the upside. The consensus is that inflation will return to the 3.0% target early in 2026 once the electricity effect is phased out, helped by a negative output gap, but the probability that this disinflation gets derailed by developments on the external front is high. The REER has been persistently weak, and negative developments surrounding a prospective trade war between the United States and China could lead to further CLP depreciation. Developments that have a direct inflationary effect, like the imposition of higher tariffs on key components of global trade, is also a risk factor that the MPC looks at. With inflation above the target and interest rate gaps compared to global benchmarks being fairly compressed, there is a greater chance that a negative external shock would require a local monetary policy response, and this will keep the MPC proceeding cautiously with cuts over the coming months.

Overall, we expect the MPC to cut 25bps to 5.00% in the next sitting, but see a higher probability of a hold than entailed in recent consensus forecasts [link]. There is a consensus on the idea that the MPC will cut 25bps in December and then hold in January, but the reverse is also an option if the MPC wants to wait for more news on US-China developments before cutting. What happens after January will depend heavily on the evolution of economic activity and global developments, and it seems unlikely that the MPC will commit to strong guidance until there are more concrete news about policy decisions in the United States under Donald Trump.

• Next MPC meeting: Dec 20
• Current policy rate: 9.75%
• EmergingMarketWatch forecast: 50bps cut

BanRep's board is expected to keep cutting its monetary policy rate by 50bps in the final sitting of the year. Despite a consistent disinflation trend, the board remains steadfast in its cautious approach due to emerging risks that could disrupt this progress. Key concerns highlighted in the latest minutes include exchange rate depreciation, uncertain fiscal policy, and significant minimum wage increases.

The latest CPI inflation data confirms the continuation of the disinflation process, with inflation easing to 5.2% y/y in November. While services contributed to upward pressure on inflation, durables, and food prices acted as stabilizing factors. Analysts project inflation to close the year at 5.1%, reflecting a marginal decrease in December. In this context, the majority of analysts expect the board to maintain its 50bps rate cuts, reducing the monetary policy rate to 9.25% by the end of the year. The consensus suggests that 50bps cuts will persist until July, when the policy rate is anticipated to reach 6.75%, at which point the pace of cuts would likely slow to 25bps.

In the next meeting, newly appointed Finance Minister Diego Guevara will participate for the first time following Bonilla's departure from the cabinet. He is expected to continue advocating for a more aggressive pace of rate cuts, in line with the government's stance. In the previous meeting, the vote was a 4-3 split, meaning Guevara faces the challenge of persuading at least one more board member to support accelerating the pace of cuts in this round. Yet, we consider this unlikely.

Overall, we expect that the board will maintain its 50bps rate cuts, as emerging risks, such as uncertainties surrounding the 2025 budget, are likely to persist into next year. Moreover, the ongoing minimum wage discussions, where consensus seems unlikely, will also play a significant role. The board has emphasized that addressing these challenges is essential for ensuring market stability and maintaining macroeconomic balance. Looking ahead, the board's composition will change next year, introducing some uncertainty about the future trajectory of monetary policy. However, the current members have reaffirmed that the board's independence will remain intact.

• Current policy rate: 4.50%
• Next monetary policy meeting: Jan 6, 2025
• Expected decision: Hold

The MPC has been keeping the policy rate steady at 4.50% in the past several meetings citing the elevated inflation environment and the increased geopolitical uncertainties as factors backing its decision. The BoI did not change the rhetoric either and continued to stress on the need to first look at the stability of the financial markets and to make efforts to reduce risks along with pulling inflation down to the 1-3% target range and supporting economic activity. BoI governor Amir Yaron has stated before that the monetary policy was still restrictive enough to bring inflation back to the target but as of October, he started mentioning a possibility to increase the rate while previously the MPC was choosing between maintaining the rate and making a cut, possibly as of Q2 2025. The likelihood for a hike is not to be neglected in the following months as risks for inflation have not disappeared and it is to increase at the start of 2025, also because of a VAT rate hike. The risks for a looser fiscal stance in 2025 have not dissipated yet either. We note that the BoI research department no longer expects rate cuts until October 2025 and assumes that the policy rate will remain at 4.50% as it would take longer for the increased inflation to return to the target. We recall that this is not a guidance or a projection of the MPC but has most likely been endorsed by the policy makers.

Data Download

Inflation has been accelerating since March until August but then moderated to lower-than-expected 3.5% y/y in September, in a positive surprise to the markets, and then stabilised at that level in October, in line with expectations. In November, inflation moderated to 3.4% while market have expected further acceleration to 3.6% y/y. The latest inflation expectations, one of the major considerations the MPC is considering in the decisions, pointed to some moderation as well. Thus, inflation developments seem to have stabilised for now but inflation has been above the 1-3% target range in the past five months. After the rate decision in October, deputy governor Abir stated that the inflation environment has become more challenging since end-August and the inflation spike was due to supply disruptions in tourism, construction and agriculture, which are not expected to start performing better in the near future, we think. The latest central bank forecast sees inflation accelerating further in early 2025 with possible moderation towards the target in H2 2025. Inflation is not likely to return to the target before Q4 2025, however, as the inflation forecast is seen at 3.2% y/y in October 2025, according to the BoI. The BoI said that the inflation forecast tends to the upside and is affected by supply limitations, which are also affecting economic activity. It continued repeating that the war and its impact on activity, the shekel depreciation, prolonged supply limitations, fiscal developments, and higher global oil prices are pro-inflationary risks.

Economic activity rebounded by above-expected 3.8% saar in Q3 but still fails to reach pre-war levels due to investment and exports. The distance to the trend is largely due to supply limitations, which have been affecting several industries, of which construction was hardest hit. However, private consumption is strong and exceeded pre-war levels already in Q2 so the MPC would risk pumping up inflation if it decides to soften the monetary policy stance, we think. The BoI revised down GDP growth projections by 1pp and 0.4pps to 0.5% in 2024 and 3.8% in 2025 and said that GDP would remain below the pre-war trend in the medium term. It said in the November rate decision that the high-frequency indicators reveal mixed signals for Q4. The fiscal policy still remains expansionary but the government has indicated that it would try to be more conservative in 2025, which is seen in the scope of the package of proposed austerity measures but it remains unclear if the entire package will pass in the Knesset. The reached ceasefire with Hezbollah in the north should contribute to reducing geopolitical risks and there are talks that a truce with Hamas is imminent too. Thus, we see the risks overall balanced pointing to no change in the monetary stance for now.

Board statements, press briefings, minutes from MPC meetings

Calendar of MPC meetings

Latest BoI macroeconomic forecasts

Monetary policy reports

Bank of Israel Law

The Monetary Committee

• Current policy rate: 15.25%
• Next monetary policy meeting: Jan 17
• Expected decision: hold

The NBK hiked the base rate from 14.25% to 15.25% at the Nov 29 meeting. The decision was arguably swayed by strong pressure on the tenge that materialised in the days before the meeting. The Russian ruble's depreciation was the strongest contributing factor alongside the impact of oil prices and the US dollar's general strengthening against emerging market currencies. In addition, the NBK expressed concern about inflation expectations, fiscal stimuli, utility tariff hikes, and domestic demand trends.

Data Download

The bank's revised year-end inflation projection now stands at 8-9% (from 7.5-9.5%). Importantly, the achievement of NBK's 5% medium-term inflation target has now been delayed to 2027. The original plan was to reduce inflation to 5% by end-2025, though the delay was expected as a whole. The rate hike corresponds with this development since the NBK has insisted medium-term inflation management is its priority. It also sees downside risks to its near-term inflation forecasts, so a tighter stance is likely to be maintained for now.

All in all, this was the NBK's last rate-setting meeting for 2024. It has indicated further tightening will be considered in case of continued volatility. Exchange rate dynamics will be decisive as the bank was already forced to sell over USD 1bn from its reserves in November in order to stabilise FX supply and curb pressures. More generally, Q1 dynamics will be an important policy determinant, especially if the government resorts to a budget revision in the context of subdued oil prices and/or other negative factors. At this stage, we have left an on-hold decision as our baseline scenario since we believe the NBK will wait and monitor short-term developments before any potential commitment to a rate hike.

• Next policy meeting: Jan 16
• Current policy stance: 3.00%
• Our forecast: Hold
• Last decision: Cut by 25bps (Nov 28)
• Rationale: Political crisis adds to existing FX market pressures that have weakened won

The Bank of Korea is likely to keep its policy rate higher for longer on the back of the political crisis that has developed since President Yoon decided unexpectedly to declare emergency martial law on Dec 3. The political crisis has added to existing FX market pressures that had weakened the Korean won even before the martial law incident. We remind that the BOK decided to cut its policy rate by 25bps on Nov 28 as it made a second consecutive cut in a row, citing the intensifying downside risks for the economy. However, the prevailing expectations were that it will keep its policy rate unchanged due to the weakening won.

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The declaration of the martial law on Dec 3 led to a sharp increase in the USD/KRW exchange rate initially after which the Korean won rebounded as parliament voted to lift the martial law. However, the current level of the USD/KRW rate remains higher than before the declaration. In our view, the USD/KRW exchange rate could still resume its uptrend given that the KRW 1,400 key resistance level has been overcome convincingly, which will likely put the BOK on the defensive.

BOK also pledged to implement various market stabilization measures to reduce financial and foreign exchange market volatility, the central bank announced after an emergency MPC meeting on Wednesday. BOK expressed confidence that market sentiment will gradually stabilize down the line driven by solid fundamentals of the Korean economy. That said, we are still rather skeptical that the worse is over for the Korean won as even though the martial law crisis has ended, an impeachment crisis is likely to start given that the opposition will now push hard to impeach President Yoon. The potential impeachment of President Yoon could also mean snap presidential elections in South Korea in 2025.

All of this will complicate significantly BOK's job, which is already made difficult due to the concerns about Trump's America First policies. In our view, the most likely scenario is that the BOK will stay on hold for longer as it weighs the different factors that impact inflation, exchange rates, real estate prices and growth. Thus, we think that the BOK will stay on hold throughout Q1, while the political crisis is being settled and the new Trump administration reveals its intentions with regards to tariffs and export restrictions to China.

Growth and inflation data

In terms of the economic situation of the country, the economy has definitely slowed down since Q3, but the latest data for October was actually more upbeat than expected. All industry production rose by 2.3% y/y in October after falling by 1.3% y/y in September led by strong industrial production growth of 6.3% y/y, solid growth in services by 1.9% y/y, which were offset by decline in construction output by 9.7% y/y. Manufacturing PMI also picked up slightly to a 3-month high in November despite the increase in risks following Trump's victory.

On the inflation front, CPI rose by 1.5% y/y in November as CPI inflation has stayed below the 2% target for three months in a row. Nonetheless, the BOK recently stated that it expects the inflation rate to return to the 2% level in December on the back of the weakening won. When it comes to household lending growth, the latest preliminary data showed that the 5 largest banks saw an increase in household loans by KRW 1.26tn m/m in November, up marginally from KRW 1.1tn m/m in October. At the same time, housing prices have been also mostly contained thanks to the tighter lending regulations introduced by banks.

Conclusion

Overall, we think that FX market pressures and growth will remain the two primary concerns for the central bank in the near future as financial stability and inflation have been mostly dealt with by authorities. BOK will keep a close eye on the political situation in the country and market sentiment as it weighs when to resume its monetary easing cycle. The decline in the USD/KRW exchange rate would also lead to higher imported inflation, potentially pushing the inflation rate above 2% yet again. On the other hand, underlying inflation remains mostly stable despite the recent slowdown in growth as evidenced by the lack of change in core inflation over the past 3-4 months.

Our forecast is that there will be no more rate cuts in Q1 2025, while rate hikes to stabilize the exchange rate remain highly unlikely as it will give conflicting signals to banks regarding the future path of monetary policy. We still expect the BOK to fully utilize the pledged market stabilization measures to strengthen the Korean won.

MPC meetings calendar 2025

Minutes

Previous MPC decisions

MPC board members

• Next policy meeting: Jan. 22, 2025
• Current policy rate: 3.00%
• Our forecast: Hold
• Last decision: Hold (Nov. 6)
• Rationale: Inflation to pick up but remain 'manageable' while growth is expected to maintain momentum

We expect Bank Negara Malaysia (BNM) to maintain status quo on its monetary policy throughout 2025, keeping the overnight policy rate (OPR) at 3.0% to support economic growth amid contained price pressure although inflation is projected to pick up. The central bank on Nov. 6 left the key rate steady for the ninth consecutive meeting, citing muted inflation while reiterating that the current monetary policy stance continues to be supportive of the economy. The strengthening of the ringgit, which has gained 2.7% against the U.S. dollar year-to-date, provided further comfort to BNM to stand pat on the OPR, which was last hiked by 25bps from 2.75% in May 2023.

Inflation environment

CPI inflation remained low at 1.9% y/y in October, up marginally from a five-month low of 1.8% y/y in September, suggesting that the government's fiscal consolidation efforts, such as diesel subsidy rationalization and a 2pps hike in services tax in March, did not spillover to broader prices. During Jan-Oct, inflation averaged 1.8% y/y, which is reportedly below its 10-year average of 2.0% as well as less than the BNM's initial forecast of 2.0%-3.5% for this year. Lower global crude oil prices and ringgit appreciation kept the cost of imports contained.

The central bank sees inflation to remain manageable in 2025, supported by easing global cost conditions and the absence of excessive domestic demand pressures. However, the removal of blanket subsidies for widely used RON95 gasoline and sales and services tax (SST) expansion pose upside risks to the outlook. The pressure from floating of RON95 price may be limited if 85% of the population is shielded from it, as pledged by PM Anwar Ibrahim. Last month, the government forecast inflation to accelerate to 2.0%-3.5% next year, from a downwardly revised 1.5%-2.5% in 2024.

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GDP growth

A pick up in economic activity on the back of resilient domestic expenditure and rebound in exports has allowed the BNM to take a step back from providing additional stimulus in the form of rate cuts. The economy expanded at a solid but slower pace of 5.3% y/y in Q3, with strong growth seen across the sectors barring the mining sector.

GDP growth clocked in at 5.1% y/y in the first three quarters of 2024, leading the government to upgrade its full-year growth forecast to 4.8%-5.3%, from the initial target of 4.0%-5.0%, largely due to better-than-expected activity in agriculture and construction sectors. For 2025, growth was expected to remain firm at 4.5%-5.5%. The BNM projects exports to remain strong on account of the global tech upcycle, which along with robust tourism and healthy household spending amid favourable employment conditions would keep the growth momentum intact in 2025.

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Exchange rate stability

The ringgit has come under pressure following the U.S. presidential election. The USD/MYR has increased by 3.0% since Nov. 5 to 4.47 as of Dec. 18. Before the polls, it had gained 9.5% against the U.S. dollar since February, when the local currency fell to its lowest since the 1997 Asian Financial Crisis. The BNM in its latest monetary policy statement said that the outcome of the U.S. elections could heighten volatility in the near term but expressed optimism that the narrowing interest rate differentials with the advanced economies, Malaysia's favourable economic prospects and domestic structural reforms are positive for the ringgit.

The central bank had previously ruled out adjusting its policy rate to prop up the currency. It has not given any clear signal that it would intervene this time around. However, BNM governor Abdul Rasheed Ghaffour last month said that the central bank stands ready to manage any spillover from global developments to domestic markets, including by ensuring sufficient liquidity in the domestic foreign exchange market.

Conclusion

All in all, we expect BNM to leave the policy rate unchanged in the near- to medium-term - a projection which is in line with the consensus forecast. A group of economists polled by Reuters predicted the central bank to hold the benchmark interest rate at least through 2025, citing steady inflation and strong GDP growth. Nevertheless, the BNM would remain vigilant for any buildup in inflationary pressures mainly due to RON95 subsidy rationalization and thus, a policy rate hike cannot be entirely ruled out.

• Next MPC meeting: Jan 1, 2025
• Current policy rate: 6.50%
• EmergingMarketWatch forecast: Hold

Rationale: We think that the NBR will not consider cutting the key rate sooner than April 2025. Easing through rate cuts will probably be back on the central bank's agenda after assessing several factors at end-Q1 2025. These include expected government measures to reduce the fiscal deficit, the effects of a higher-than-projected food inflation caused by bad weather conditions in 2024, and the expiration of the energy price cap schemes in March 2025. In addition, the NBR revised upwards its 2024 and 2025 inflation forecasts. It explained that CPI growth will pick up at the end of 2024 and fluctuate at the beginning of 2025, before re-entering a consolidated moderation trend, on a higher path than previously projected.

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The next MPC meeting is on Jan 1, 2025, and we believe the rate will remain at 6.50%, keeping real rates in the positive territory for longer and a tight monetary policy, to counterbalance a very relaxed fiscal policy. We ground our assumption on a persistent double-digit service inflation, a considerably wide fiscal gap, and higher-than-expected inflationary pressure in the food sector due to bad weather. We also consider robust wage rises and the potential upward trend of oil prices due to conflict intensification in the Middle East. Further on, the government measures to contain inflation, like price caps in the energy market and markup caps on several basic foods, expire at end-March and at the beginning of next year, respectively. Besides, a board member once said that the central bank was pausing key rate cuts in the context of challenging fiscal consolidation.

The November inflation release confirmed the new NBR inflation outlook, namely inflation speeding, mainly driven by resilient demand in non-food, higher-than-expected food inflation and sticky double-digit service inflation, amid robust wage rises. These developments come on top of a risky setting, with a quite relaxed fiscal policy, very high government deficit, large spending in election year and consumer lending acceleration despite high rates. Therefore, we believe a more prudent approach would be suitable, favouring a policy rate hold decision for now. In fact, NBR Governor Mugur Isarescu several times stressed on the effects on inflation and CA deficit of a worryingly high fiscal gap and wage increases that are not correlated with productivity.

On the external front, markets turmoil and increased geopolitical tension in the Middle East and Ukraine mirror low predictability in financial markets and high risks of other disruptions in commodity markets. Moreover, the NBR often stressed that it also considered policy decisions of the central banks in the region, Fed and ECB.

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

• Current policy rate: 21.0%
• Next monetary policy committee meeting: Dec 20
• Expected decision: 100-200bp hike

We think the CBR will be forced to hike the key policy rate this week in response to much higher-than-expected current inflation, but we expect a decision that is more dovish than the consensus. Thus, we see chances for a 200bp rate hike in combination with more dovish rhetoric suggesting that this is the end of the tightening cycle or a below-consensus 100bp rate hike. The majority of local analysts expect a 200bp rate hike with a significant minority betting on a more radical hike of 3-4pps.

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By far the main argument for a rate hike is current inflation, which climbed to 9.3% y/y as of Dec 9 compared to the CBR forecast that it will be slowing down toward 8.0-8.5% y/y at the end of 2024. This alone should normally be enough for a significant rate hike. The latest surge in inflation from 8.9% y/y in November reflects the ruble weakening at the end of November, which contributed around 0.4-0.5pps to the acceleration of headline inflation, but inflation was running above the forecast also before that, driven mainly by food prices. Inflation expectations also remained high at 13.4% in November and will likely increase further this month.

Arguments against further tightening have also strengthened and they are mainly related to monetary and credit conditions. The marked deceleration in household lending continues, while corporate lending also started to slow down in November. Besides, the CBR has taken regulatory measures to tighten corporate lending with macroprudential limits from April 1, 2025, while the FinMin announced steps to reduce interest rate subsidies for lending to companies. These subsidies are often blamed for reducing the effectiveness of key rate hikes in fighting inflation and it can be argued that their reduction is effectively tightening of monetary policy. Another dovish argument is the continuing tightening in monetary conditions as banks hiked both deposit and lending rates in November. There was further increase in December, partly fueled by expectations of a forthcoming policy rate hike.

Developments in the real economy are more mixed. We noted an observation by the CBR in its December economic report that the contribution of demand to inflation has declined for the first time since March. The debate as to whether high inflation is driven predominantly by supply or demand factors has been a key one and the CBR previously defended the view that demand was the main culprit. Otherwise, signs of economic slowdown are still weak with retail sales growth high at 4.8% y/y in October and unemployment declining to a new record low of 2.3%. PMI indices actually improved in October and November.

The exchange rate has mixed implications as the ruble rebounded in December after the sharp drop and weekly inflation is likely to slow down in the remaining weeks of the month. The higher base from December will also help the inflation forecast for 2025.

Apart from macroeconomic considerations, we believe there is growing pressure on the CBR to halt monetary tightening. This was seen in statements of government officials and especially managers of state companies and banks. Most noteworthy were comments by President Putin, calling on the FinMin and the CBR to work together and also pointing at supply-side decisions as the key to reducing inflation. This seems more in line with the view of the EconMin that inflation is driven by supply-side factors and further CBR rate hikes have little effect on it, while suppressing the economy.

With all this in mind we will not be surprised to see the CBR move gradually from "if inflation is not falling fast enough it means the key rate is not high enough" toward "the key rate is at an adequate level, but it will take more time for the effect to be felt". If this is the case, we can expect a smaller rate hike or the consensus hike of 200bps with a comment that the key rate is likely to stay at that level for longer.

• Next MPC meeting: Jan 30, 2025
• Current policy rate: 7.75%
• EmergingMarketWatch forecast: 7.50%

The MPC delivered the two 25bps rate cuts as expected in September and November, bringing the main policy rate down to 7.75%. The latest inflation print for October stands at 2.8%, a rate well below the mid-point of the 3.0-6.0% target range preferred by the central bank. The baseline projections are for the inflation rate to stabilise near the target on the policy horizon. Inflation expectations two-years ahead reached 4.8% and should continue to moderate further thanks to the experience of lower actual inflation, according to the central bank. Finally, the risks to the inflation outlook are currently (as of November) assessed as balanced.

These developments are all the right reasons which could provide the MPC with the space to reduce its policy rate further next year. In the base-case scenario, we anticipate that the policy rate could be cut by another 50bps in the first half of the year. The first rate meeting in 2025, which is set for Jan 30, could deliver the initial 25bps reduction. The following meetings are scheduled for Mar 20 and May 29.

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Although the central bank commenced with anticipated monetary policy easing in Q3 and Q4 2024 and the base-case remains favourbale for further reductions next year, headwinds have emerged. The MPC went to great lengths during the latest policy rate announcement in November to highlight the unusually high degree of uncertainty and the required level of cautiousness. Governor Lesetja Kganyago pointed out that a 50bps reduction was not on the table in November and that the MPC discussed adverse scenarios in which inflation was above the target over the policy horizon. Cautiousness is indeed warranted along several broad lines listed below which will require a close monitoring of data and developments:

• US trade and monetary policy - the election of former president Donald Trump in November is a considerable risk on South Africa's export, global commodity prices and the rand. If trade wars materialise and South Africa's exports are affected, the scope for the rand would be open to USD/ZAR 20. This will have a major impact on domestic inflation and monetary policies respectively, via the fuel price most immediately and other import prices as well. Dollar strength since the November elections in the US has already weakened the rand and there is some evidence of resurging inflationary pressures. A shift in US policies could also lead to a shallower or shorter interest rate cutting cycle there which is directly relevant to interest rate differentials with emerging markets. Although the SARB has noted it does not follow the monetary policy steps implemented by the Fed, a change in the course on this front will act to deter further easing in South Africa.
• Geopolitical risks - intensification of the hostilities in the Middle East could lead to higher oil prices and along with potential rand weakness would have a strong impact on domestic inflation.
• Electricity tariffs - NERSA is conducting hearings on the electricity price hike of 36.1% requested by Eskom as of Apr 2025. This is the main driver behind the acceleration of inflation towards 4.6% from late 2025. Electricity and other administered prices are a major headache for the central bank's price objective. The SARB said in its November MPC statement that the medium-term outlook is highly uncertain with material upside risks including higher prices for food, electricity and water, as well as insurance premiums and wage settlements

Monetary Policy Committee Statement, Forecasts and Assumptions

Monetary Policy Review

• Next Policy Meeting: TBD (Q1 2025)
• Overnight Policy Rate (OPR): 8.0%
• Standing Deposit Facility Rate (SDFR): 7.5%
• Standing Lending Facility Rate (SLFR): 8.5%
• Previous Decision: New OPR set at 8% (Nov 27)
• Our Forecast: Hold
• Rationale: The Central Bank of Sri Lanka (CBSL) will permit the recent monetary policy adjustment and further easing to permeate the economy before considering additional rate cuts.

Policy Overview

The Central Bank of Sri Lanka (CBSL) has implemented a pivotal adjustment to its monetary policy framework, introducing a unified policy interest rate mechanism as of November 27. The newly established Overnight Policy Rate (OPR) is set at 8.00%, replacing the prior dual rate system and serving as the principal instrument for steering monetary policy, indicating a sustained easing of the Bank's approach. This alteration reflects an approximate reduction of 50 basis points from the existing Average Weighted Call Money Rate (AWCMR). Under this revised framework, the OPR will be periodically modified to align with the CBSL's monetary policy objectives. The Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR), which previously defined the limits for overnight interbank transactions, will now be anchored to the OPR with a margin of ±50 basis points, establishing these rates at 7.50% and 8.50%, respectively. As expected, the CBSL chose to further relax monetary policy in light of persistent deflation observed in September and October. With the economy striving to enhance activity levels, the central bank is concentrating on fostering credit growth to stimulate economic momentum. Supporting economic expansion remains the CBSL's foremost goal in the near term.

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Inflation Trends

Sri Lanka's inflation landscape has experienced a significant transformation. After a year of effective inflation control, the Central Bank is now prioritizing economic growth stimulation. In November, the Colombo Consumer Price Index (CCPI) recorded a y/y decline of 2.1%, indicating deflation. This trend has been propelled by decreasing prices for fuel, electricity, and gas, with additional price reductions anticipated. While the short-term outlook suggests deflation, inflation is expected to hover around the 5% target in the medium term. The decision to further ease policy responds to escalating deflationary pressures and an optimistic external economic outlook. Core inflation, reflecting underlying demand strength, has also moderated. According to CBSL forecasts, headline inflation is likely to remain negative in the near term due to ongoing declines in fuel and transport costs along with easing food prices. However, it is projected to turn positive by mid-2025 and gradually approach the 5% target over the medium term, supported by strategic policy measures. Core inflation is expected to stabilize following a brief dip, with inflation expectations showing further signs of moderation since the last review. Looking ahead, the CBSL is anticipated to adopt a cautious stance and closely monitor price developments following the recent rate cut. The central bank will also remain vigilant regarding policy actions from the incoming government. Additionally, it is expected that the CBSL will proceed with caution after the government's 2025 budget is revealed on January 9, 2025.

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Economic Growth

Sri Lanka's economic recovery is steadily advancing, with real GDP growing by 4.7% y/y in Q2 2024, slightly below the 5% growth recorded in Q1. This marks a full year of positive growth following five quarters of economic contraction. The industrial sector led this expansion with a robust year-on-year increase of 10.9%, driven by strong performances in utilities, chemicals, metals, and wood products. Agriculture grew by 1.7% year-on-year due to seasonal factors, while construction experienced impressive growth at 11.9%. In contrast, the services sector saw a more modest increase of 2.5%. However, tourism-related industries such as insurance and accommodation reported significant gains. The recovery is being supported by reforms under the IMF program and a resurgence in tourism activity. By mid-November 2024, Sri Lanka had welcomed over 1.8mn tourists, indicating continued strong arrivals for the remainder of the year. Nonetheless, disbursement of the next tranche from the IMF may encounter delays as government reviews are still ongoing.

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External Sector

Sri Lanka's external sector has exhibited mixed performance trends. The trade deficit expanded in early 2024 due to rising imports; however, tourism revenues surged as arrivals surpassed 1.8mn through November. Remittances also improved, enhancing the current account position while the Sri Lankan Rupee appreciated over 7% against the USD in 2024, with gross official reserves reaching USD 6.4 billion in October. Progress in debt restructuring has been significant, with recent agreements with bondholders marking a key step toward stabilizing national finances. A recovery in exports during H2 2024 is anticipated due to improvements in global trade; however, risks such as geopolitical tensions and U.S. elections may impact timelines.

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Outlook

With inflation subdued and growth on an upward trajectory, CBSL is expected to maintain its current supportive monetary stance following recent rate cuts. Rather than pursuing additional easing measures, it is likely that rates will remain steady at upcoming meetings to evaluate the effects of recent actions taken by the central bank. Key factors driving economic stability include tourism recovery, structural reforms, and support from IMF initiatives; however, potential delays in fund disbursement and external uncertainties could hinder recovery momentum. With parliamentary elections concluded the focus will shift toward government policy initiatives that CBSL will closely monitor for their potential impact on broader economic trends.

Further reading

Last MPC decision

• Next MPC meeting: Feb 26, 2025
• Current policy rate: 2.25%
• EmergingMarketWatch forecast: Hold or 25bp cut
• Rationale: MPC voting result on Dec 18; MPC statement of Dec 18

We think that a hold decision and a 25bp policy rate cut are both possible at the next meeting of BOT's Monetary Policy Committee (MPC) that is scheduled for Feb 26, 2025. On Wednesday, the MPC voted unanimously to maintain the policy interest rate at 2.25%. The decision was in line with market expectations. The MPC considers the current rate level consistent with the economic trajectory near potential, inflation moving towards the target band and safeguarding long-term macro-financial stability. Another reason for the hold decision was preserving policy space amid rising uncertainties going forward.

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One argument supporting the expectation of a hold decision is the unanimous vote on Wednesday. Thailand's fourth-quarter GDP performance will be known by Feb 26. One possibility is that the country's economic growth will be indeed near potential, which could be again a reason for a hold decision. Certainly, the need for "safeguarding long-term macro-financial stability" will be in place in February as well.

The MPC said on Wednesday it maintained the policy rate also in order to preserve policy space amid rising uncertainties going forward. Some of the current uncertainties will be resolved by February, given that the new US President will be inaugurated in January. We expect that the outcomes will likely support the case for a policy rate cut in Thailand. On Wednesday, the BOT predicted that both headline and core inflation will have a quite steady trajectory near the lower end of the target range of 1-3%.

GDP

The MPC forecasts GDP growth of 2.7% in 2024 and 2.9% in 2025. Both projections are unchanged from October. Tourism and domestic demand remain the main drivers, as well as exports of electronics and machinery in line with the anticipated recovery in the global technology cycle. Nonetheless, the economic recovery continued to be uneven across sectors.

While tourism-related services improved, the recovery for SMEs and certain manufacturing industries was affected by decreasing competitiveness. For instance, both price and demand factors impacted the automotive industry. The result was an uneven income recovery for households. Given that the policies of major economies continue to be highly uncertain, it is crucial to monitor such developments which could impact goods exports and private investment for Thailand going forward, the MPC pointed out.

Inflation

The MPC forecasts headline inflation of 0.4% this year, down from 0.5% expected in October. The projection of 2025 inflation was also revised down, to 1.1% from 1.2%. Given global crude oil prices, energy inflation is predicted to stay low. The central bank expects headline inflation to stay close to the lower end of the 1-3% target range without reflecting deflation risk. Compared to October, the MPC raised slightly its core inflation forecasts for 2024 and 2025, to 0.6% from 0.5% and to 1.0% from 0.9%, respectively.

Overall, medium-term inflation expectations continued to be consistent with the target, the BOT said.

Lending

The MPC attributed the recent slowdown in credit to the decline in investment demand for some business sectors, debt repayments for loans borrowed during the coronavirus pandemic, and still heightened credit risks. In sectors like tourism and services, credit growth slowed down due to debt repayments and higher income. Lending growth for manufacturing sector SMEs which faced increased competition fell amid heightened credit risks.

The MPC sees a need to monitor credit growth developments and the implications for economic activities, as well as the effects of the government's "Khun Soo, Rao Chuay" (You Fight, We Help) initiative that is intended to ease the financial burden for debtors struggling with repayments.

Exchange rate

The Thai baht is trading at USD/THB 34.235 as of the time of writing, which compares with USD/THB 34.35 on Dec 29, 2023. The exchange rate was USD/THB 33.21 on Oct 16, the date of the preceding MPC meeting.

Further reading

MPC decision of Dec 18

Schedule of MPC meetings

Edited minutes of MPC meetings

Monetary policy report

• New rate: 13.5%
• Inflation keeps accelerating
• Next rate decision: Jan 23

Although the market expected another on-hold decision, the central bank (NBU) on Dec 12 increased the key policy rate to 13.5% from 13.0%. The first rate hike since mid-2022 was due to the faster than anticipated inflation acceleration so far this year, the NBU explained. Headline CPI inflation accelerated to 11.2% in November from 9.7% y/y in October, whereas in October the NBU had expected acceleration to 9.7% only by December. The NBU said that although high food prices were the main culprit, core inflation also kept rising relatively fast, to 9.3% y/y in November, on the back of high production costs and the hryvnya weakening.

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The NBU said it would further tighten its policy if signs of 'unrelenting inflationary pressures' persist, so another hike is possible at the next MPC meeting scheduled for Jan 23. Most recently, the state railway monopoly Ukrzaliznytsya announced plans to hike freight tariff by 37%, which will inevitably add to inflation. Still, the NBU reiterated on Dec 12 that inflation should climax next year and fall towards the 5% target later on. The NBU, apparently reflecting the expectations of a war freeze, said the situation should improve next year in agriculture and in the energy sector, devastated by Russian missile strikes. The NBU also noted the steady inflow of financial assistance.