• 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) is expected to raise the key Selic rate by 100bps to 13.25% at its nearest policy meeting Wednesday, which will be the first meeting under Gabriel Galípolo's leadership as BCB governor. The hike was pledged at the Copom's December 2024 meeting and in the minutes under former Governor Roberto Campos Neto, and it is unlikely to be altered despite the committee's new composition, which sees Galípolo in charge and a majority of members having been appointed by President Lula da Silva. Persistent inflationary pressures and global uncertainties should support the decision. The Copom also indicated plans for another 100-bp hike at its subsequent meeting in March, which we expect to be reiterated at the January meeting, although we are not sure if the committee will give guidance beyond March.

Expectations of a coming hike were cemented after IPCA-15 inflation rose 0.11% m/m in January, well exceeding the consensus expectation for 0.03% deflation, though the annualized rate slowed to 4.50% y/y from 4.71% in December, according to IBGE data released last Fri. The increase was driven by rising food and beverage prices, countering a sharp drop in housing costs due to lower electricity prices. The higher-than-expected inflation print prompted analysts polled by the BCB in this past week's Focus Report to raise their 2025 inflation forecast to 5.50% from 5.08% a week earlier, reinforcing expectations for the 100-bp hike this week.

Food inflation remains a government concern, and effective short-term solutions appear limited despite the government's statements that it is looking for means to control it. Upcoming adjustments to diesel prices by Petrobras, coupled with a scheduled tax increase for diesel and gas on February 1, are expected to further elevate inflation.

The January meeting marks the first under a Copom majority appointed by Lula, and this change likely influenced the committee's decision to reinstate forward guidance late last year, in our view. The guidance given aims to reduce uncertainties regarding monetary policy under the new leadership. To maintain credibility and anchor expectations, we anticipate a unanimous decision for the Selic hike despite potential criticism from the Workers' Party (though not directly from Lula).

Overall, the Copom is expected to follow through on its December guidance with a 1-pp hike to 13.25% on Wednesday, and signaling a further increase to 14.25% in March. Beyond March, it is unclear if the committee will continue giving guidance. In our view, forward guidance could be dropped, though additional Selic hikes are anticipated in smaller increments, pushing the rate to a peak. Analysts polled by the BCB predict a terminal rate of 15.00%, implying another 75-bp hike after March. However, internal and external inflationary pressures could push the Selic beyond 15% before the tightening cycle concludes, in our opinion.

• Next MPC meeting: Feb 6, 2025
• Current policy rate: 4%
• EmergingMarketWatch forecast: 25bp cut

Rationale: As we expected, economic data will be instrumental for the next monetary policy decision, though there is plenty of uncertainty around it, which is why we don't believe the outcome is set in stone. There are upside risks to inflation that may force the CNB to hold the policy rate for a second meeting in a row, and much will depend on upcoming price data. The MPC vote on Dec 19, 2024 did not make things easier, as an outspoken dove as Jan Frait voted to keep interest rates unchanged, while a generally hawkish-minded board member like Jan Prochazka voted for a 25bp cut. Yet, data appears to be increasingly placing risks a bit later in Q1 2025, which is why our confidence that we will see a 25bp cut on Feb 6 has risen.

We remain cautious mostly because of how the debate at the MPC meeting on Dec 19 went down, as price stability was the predominant topic in the discussion, by a wide margin. We feel that the majority which supported stable interest rates is increasingly concerned with taming inflation, and it has attributed far less weight to economic activity. Eva Zamrazilova, the strongest hawk on the board currently, downplayed heavily the downward impact of a persisting slowdown in economic recovery, arguing that factors pushing inflation upwards would be stronger. Yet, she also admitted that the better-than-expected CPI print in December, at 3% y/y against 3.3% y/y expected, was an argument to allow resuming the monetary easing cycle. We have seen similar remarks by Prochazka, as well as by CNB governor Ales Michl, which puts the odds increasingly in favour of a 25bp cut.

Risks remain tilted to the upside, though probably more towards MPC meetings from March onwards. Service price inflation has remained sticky, as service prices rose by 5% y/y in December and by 5.1% in 2024. Thus far, sluggish economic recovery has impacted mostly goods' prices, which rose by only 0.9% in 2024, so there is some weight in the argument that modest economic growth will provide a noticeable disinflationary impact. We see the issue being related to the sharp decline in real wages that Czech households experienced in 2022 and 2023 (a cumulative drop of 11.3%). Given the acute shortage of skilled labour and higher wage expectations, the service sector has seen the biggest source of solid wage growth in 2024 thus far, and we expect this to continue in 2025. It likely means that service prices will continue rising at a solid pace, as we don't imagine service providers absorbing higher labour costs through narrowing profit margins. While we are hearing more frequently about planned redundancies, these appear to be mostly low-earning positions, which means that average wages will actually pick up growth.

The other group of risks is geopolitical, related to deglobalisation (like higher US trade tariffs) and geopolitics (the Russia-Ukraine war). There is a lot we don't know yet regarding US tariff policy. For example, there will be likely a difference if tariffs are introduced in one big swoop, or gradually, with hikes seen every month. What we have seen thus far hasn't been helpful, and is rather in line with Donald Trump's erratic style. A scenario with a one big tariff hike will be the preferred one, as it will lead to a single upside shock that we see easier to overcome. On the other hand, a gradual increase will likely fuel inflation expectations much more, as there will be a constant uncertainty when tariff hikes will end. Meanwhile, the latest sanctions on the Russian oil sector have the potential of pushing energy prices up again. We also cannot rule out that Ukraine will keep attacking Russian energy infrastructure in an attempt to get a better ceasefire deal (we believe a permanent peace agreement is not really on the table, or at least not yet).

All of these risks will take some time to kick in, however, which is the primary reason why we updated our prediction to a more doveish one. Even if all these risks materialise, we don't see the supply side shocks hitting European economies earlier than late Q1 2025, so likely to be seen in March or April CPI prints. We expect that in case of a new energy crisis, the Czech government will react quickly, as it has more fiscal space than its CEE peers, and there is a general election around the corner, likely in late September. Regarding US trade tariffs, the impact on Czech prices will be mostly an indirect one, through Germany and France, who are much more exposed to trade with the US. In any case, we don't expect a big shock immediately, so the January CPI print may turn out to be a benign one, which increases the odds of a 25bp cut on Feb 6. What may prevent a cut is a faster-than-expected deterioration in energy prices, and an upward surprise from service prices. The CNB board has strongly implied that it will not consider a food price hike a permanent risk, as expectations are that food prices should ease in Q2 2025.

We remind that the Czech statistical office is launching a flash CPI release, the first of which will be published on the date of the next MPC meeting, Feb 6. The flash release will have a breakdown of food, energy, goods, and service prices, so it will be a good early indicator of where inflation will go in 2025. The January CPI print is considered important in the Czech Republic, as it tends to reflect a repricing of goods and services that typically occurs at the beginning of each year. Regarding data series to watch, these include the flash GDP print for Q4 2024 and the entire 2024 (Jan 31), fuel prices in January (Jan 31), and the flash CPI release for January (Feb 6).

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Further Reading:

CNB board statement from latest MPC meeting, Dec 19, 2024

Post-meeting press conference, Dec 19, 2024 (in Czech)

Q&A after the latest MPC meeting, Dec 19, 2024

Minutes from the latest MPC meeting, Dec 19, 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: Feb 20, 2025
• Current policy rate: 27.75%
• EmergingMarketWatch forecast: 26.75%

The MPC will hold a regular rate-setting meeting on Feb 20 and we the think the committee may finally launch the monetary easing cycle with a 100bps rate cut. Consumer inflation has been on a downward since it peaked at 37.9% y/y in September 2024, interrupted by fuel and electricity price hikes during 2024. The slowdown is expected to continue throughout 2025, supported by favourable base effects, tight policy stance, steady disinflation in the heavy-weight food category, and improvement in inflation expectations since the currency reform from March 2024. Further, market reports suggest foreign portfolio investors have returned since the start of the year, and regional tensions appear to be easing under a ceasefire agreement in Gaza. Should the ceasefire agreement hold and the hostilities in the Red Sea subside, the traffic through the Suez Canal - a key FX earner for Egypt - is expected to gradually recover.

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There are, however, risks to the disinflation path, such as regional tensions, higher than anticipated pass-through of fiscal measures, and global supply line disruptions due to higher tariffs. While energy commodity prices have mostly moderated, commodity prices continue to be susceptible to supply shocks such as global trade disruptions and adverse weather conditions. We believe the MPC will take these risks into account and will implement a cautious 100bps rate cut next month. Further, education costs are expected to be raised in February, as Egypt had postponed the adjustment that was due in October, which may add a full percentage point to the headline inflation rate.

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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. In the last meeting for 2024, the MPC also decided to extend the inflation target horizons to Q4 2026 and Q4 2028 at 7% (+/- 2.0pps) and 5% (+/- 2.0pps) on average, respectively, in line with CBE's gradual advance towards implementing a fully-fledged inflation targeting regime.

Monetary Policy Committee Statement

Monetary Policy Review

Monetary Policy Committee Meeting Schedule

• Next MPC meeting: Feb 25, 2025
• Current policy rate: 6.50%
• EmergingMarketWatch forecast: Hold
• Rationale: MPC changes guidance to signal taking rate cuts off the agenda

The MPC is likely to keep the policy rate on hold for a prolonged period of time, as the outlook on monetary policy shifted with its rate-setting meeting in January. The MPC kept the policy rate and the overnight interest rate corridor unchanged on the meeting, but signalled deteriorating inflation outlook. it introduced a small, but visible change in the wording of its policy guidance, omitting the earlier description of the monetary policy stance as a pause in the rate-cut cycle. Instead, the MPC said that it will keep monetary conditions tight. The change in the guidance aimed to signal that the prospect for a policy rate cut has been taken off the agenda, NBH deputy governor Barnabas Virag signalled at the background discussion after the rate-setting meeting. Moreover, Virag disclosed that the hold decision on the policy rate in January was taken with a unanimous decision, contrary to the previous two meetings, on which NBH deputy governor Mihaly Patai had voted for 25bps rate cut. The voting distribution should again suggest that the external environment has shifted to such an extent that the potential for monetary loosening has practically disappeared in the short term. We expect that this stance might continue after NBH governor nominee Mihaly Varga takes office in March, given that we expect him to be conservative and not to push for major policy shifts.

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The deterioration of the inflation outlook required the change in the monetary policy stance by ruling out possible rate cuts in the short term, the MPC and Virag explained. The MPC underlined that it will continue to keep the real policy rate sufficiently positive to support the achievement of the mid-term inflation target of 3.0% in a sustainable way. Recent developments have shown that the inflation path could shift up in 2025, compared to the latest NBH projections from Dec 2024, the MPC pointed out. Monthly re-pricings in December were also higher than expected, it underlined. Accordingly, the timing of achieving the inflation target will happen later than expected till now, it said. The MPC highlighted an upward trend of inflation expectations, excise tax hikes and the depreciation of the forint as the factors behind the deterioration of the inflation outlook, in addition to uncertainty regarding the monetary policies by leading global central banks.

Monetary policy decisions going forward will be based on the evaluation of three set of factors. The first set included inflation expectations, forint exchange pass-through and global commodity prices. The second set included developments of the external and fiscal balances, followed by country-specific risks and changes in foreign investor sentiment, Virag explained. In addition, the MPC signalled further efforts to stabilise the forex swap market by highlighting the need for measures to improve the monetary transmission mechanism, adding satisfaction with its recent forex swap liquidity injection at an increased implied interest rate of 6.0%.

Post-meeting MPC statement from December rate-setting meeting

Presentation of Barnabas Virag on press conference after December MPC meeting

Minutes from December rate-setting meeting

Latest Inflation Report - Q4/2024

MPC meeting calendar 2025

• Next Policy Meeting: February 5-7
• Current Policy Rate: 6.5%
• Last Decision: Hold (October 9, 2024)
• Our Forecast: Cut by 25bps
• Rationale: With inflation easing and the growing call for a rate cut to support growth, the RBI will likely cut its rate by 25bps; INR weakness may weigh on the decision though

The Reserve Bank of India's next Monetary Policy Committee (MPC) meeting is scheduled for February 5-7, 2025, with the current repo rate standing at 6.5%. At its December 6 meeting, the MPC decided to maintain the benchmark rate, alongside the standing deposit facility (SDF) at 6.25% and the marginal standing facility (MSF) at 6.75%. Four committee members supported the decision to hold, while two favored a 25bps rate cut. The MPC maintained its neutral stance, prioritizing inflation control and growth stability. Although October's rate decision marked a shift toward a more accommodative approach, the inflation breach of 6% postponed any immediate rate reductions.

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Inflation Dynamics

Inflation remains a significant concern, driven primarily by food price volatility resulting from erratic weather and supply chain disruptions. After moderating to 3.5% in July, CPI inflation surged to 6.21% in October, exceeding the RBI's upper tolerance limit. While government measures, such as releasing strategic reserves of essential commodities, have provided temporary relief, external risks like volatile global oil prices and geopolitical tensions persist. However, with fresh agricultural produce expected to ease food prices in the coming months, inflation is anticipated to moderate, creating room for potential policy adjustments. CPI moderated to 5.2% y/y in December, which has created room for the RBI to cut rates in the coming month.

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Economic Growth

On the growth front, India's Q2 FY25 GDP data revealed a slowdown, with private consumption weakening and public spending growing only modestly. Manufacturing GVA dropped sharply to 2.2% y/y from 7% in Q1, while agriculture remained resilient with a 3.5% y/y growth, up from 1.7% in the same quarter last year. The slowdown in industrial activity prompted the RBI to revise its FY25 GDP growth forecast downward to 6.6% y/y from 7.2%. Persistently high inflation has eroded urban purchasing power, further dampening demand.

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Recent PMI data also points to continued weakness in Q3 FY25, though the RBI expects a revival in H2 FY25 as government spending accelerates and private demand recovers. Given the deceleration in growth, the calls for a rate cut have been increasing, and the RBI finds itself in a fix attempting to manage inflation, exchange rate and growth.

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Financial Sector

India's financial sector remains robust despite these challenges. Credit growth averaged 16% y/y in 2024, driven by demand in services, personal loans, and infrastructure projects. Meanwhile, foreign exchange reserves stood at USD 640.3bn at end-2024, providing a buffer against external shocks. However, of growing concern is the steadily depreciation INR against the USD. A strong greenback drive by improving US metrics has weighed on emerging market currencies. The INR slid to a record low of 86.7 against the US dollar this week. Keeping in mind the exchange rate conundrum, there is a small possibility that the RBI may not cut rates in February.

Conclusion

Looking ahead, the RBI is expected to pivot toward a rate cut in Q1 2025, with the February meeting likely to see a 25bps reduction. The central bank's cautious approach stems from balancing inflation control with supporting growth amid slowing economic momentum. We anticipate this cut despite a weakening INR, as the window for rate cuts may now be smaller for the RBI as the Federal Reserve is likely to ease up on rate cuts in 2025. Further, the new RBI Governor Sanjay Malhotra, known for his dovish leanings, may also influence the MPC toward a more accommodative stance. With inflation projected to ease further and economic growth showing signs of strain, a rate cut appears increasingly probable as the central bank seeks to foster a more supportive monetary environment.

• Next policy meeting: Feb 18-19
• Current policy rate: 5.75%
• Our forecast: Hold
• Last decision: Cut, 25bps (Jan 14-15)
• Rationale: Rupiah's stability is the main determinant of monetary policy as inflation remains within the target band

We expect Bank Indonesia to keep the key rate on hold in February, after the surprising 25bp rate cut in January. The central bank would likely want to evaluate the impact of the last rate cut on both GDP growth and the rupiah's exchange rate before proceeding with further policy easing.

Previously, the central bank cut the key rate only once in Sep 2024, after which external geopolitical developments forced it to pause its monetary easing cycle.

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The rupiah's stability used to be the main factor behind MPC decisions in 2024, but the last rate cut came on the back of ongoing depreciation against the USD. This possibly suggests that the exchange rate has now taken a backseat and the BI's is more concerned with lowering the key rate while inflation is close to the bottom end of its 2.5+/-1% target band in a bid not to suppress economic activity.

Moreover, the Fed's monetary easing plans have been delayed in 2025, after the three successive rate cuts in H2 2024. With expectations for a more gradual policy easing by the Fed, this should provide some breathing space to Bank Indonesia and ease the pressure on the local currency.

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. Notably, BI cut slightly its GDP growth forecast to 4.7-5.5% in 2025, matching the forecast for 2023, in its last MPC decision, prompting speculations that it is concerned with economic growth slowing in the tight monetary policy environment.

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% this 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 lost 6.3% against the USD in 2024, with the downward trend continuing in early 2025 as well. There was some recovery in Q3 2024, but it was short-lived as growing tension in the Middle East coupled with Trump's win at the US presidential elections boosted the USD against all EM currencies.

The rupiah's stability had been the main factor behind recent key rate decisions, with its depreciation leading to rate hikes earlier in 2024, while the gains in Q3 led to a rate cut perhaps sooner than expected. However, the BI abandoned this trend in January, cutting the key rate despite the ongoing depreciation.

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 inched up to 1.57% y/y in December from 1.55% y/y in November. This was the second-slowest inflation rate since Jul 2021. The central bank's target range is 2.5+/-1%. On the other hand, core inflation remained flat m/m at 2.26% y/y.

As a result, it seems that CPI inflation has bottomed close to the lower end of the central bank's target band. So far, the weak rupiah has failed to put significant pressure on domestic consumer prices, suggesting imported inflation is rather low.

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 no sooner than Q2, in our view, provided that the rupiah stabilises around the current level.

On the other hand, should the BI redirect its attention to economic growth, we may in fact see another surprising rate cut, perhaps sooner than expected. The pace of the Fed's monetary easing will also play a key role, as further delays on the Fed's side might lead to the BI remaining on hold for longer, in our view.

Further reading

Last MPC press release

Calendar of MPC meetings

• Next MPC meeting: February 6
• Current policy rate: 10.00%
• EmergingMarketWatch forecast: 50bps cut

The currency has shown sharp volatility over the past few weeks, responding to the threat of the US imposing broad tariffs on Mexican goods, and on the overall uncertainty brought by the US administration; however, we believe this turmoil won't be enough to push a dovish CB away from agreeing on a 50bps cut in the upcoming monetary policy sitting. Moreover, although the currency has shown periods of swift depreciation, as it did on Monday, the currency is not in an uncontrolled upward trend and, thus, its final impact on CPI inflation is yet to be seen.

We are confident the CB will be accelerating its easing cycle in February, with a 50bps cut. This expectation is based on the dovish position assumed by the Monetary Policy Council (MPC), a positive disinflation print coming out from January H1, and on the relative stability shown by financial markets so far in January, despite the uncertainty brought by US President Donald Trump. Indeed, our main doubt about the magnitude of the rate cut is precisely the impact the US administration might have on the financial markets, considering sharp turmoil could indeed delay or cancel an acceleration of the easing cycle. This is particularly relevant considering Pres Trump threatened to impose a 25% tariff on Mexican goods on February 1.

The MPC is currently incomplete because President Claudia Sheinbaum is yet to appoint the successor to Irene Espinosa. This means a 2-2 vote, backed by Governor Victoria Rodríguez is enough to assure the acceleration of the cycle. We are confident both the governor and Deputy Governor Omar Mejía will back a 50bps cut even if conditions worsen. We expect Deputy Governor Galia Borja to agree to faster easing too, if conditions hold. We believe it's possible for Deputy Governor Jonathan Heath to back a 50bps cut if CPI inflation remains relatively low in January H2, even though he's called for a cautious MPC. Thus, our base expectation is that the CB will cut its MPR by 50bps unanimously.

We do not expect an appointment by Pres Sheinbaum before the February sitting. However, we expect whoever is picked to join the dovish side of the board. Indeed, we see the 2025 board being the most dovish in recent history.

Looking beyond the February decision, we expect the CB to remain dovish, perhaps insisting on the possibility of a new 50bps cut. The latest monetary policy outlook report suggests the CB sees conditions to ease its policy rate by 250bps while remaining on restrictive territory. This suggests a dovish CB may ease more than the market currently expects in 2025. However, this might end up depending on all sort of factors, including the disinflation process, a revision by market inflation expectations, the uncertainty coming from the US protectionist policy, the Federal Reserve's strategy and so on. Thus, we still believe it makes sense to anticipate easing of about 200bps in 2025.

Overall, we expect the CB will cut its policy rate in upcoming sittings. We expect a 50bps cut in February, bringing the MPR down to 9.50%. We won't be surprised if the CB matches such cut in late March, so long as the financial sector doesn't show turbulence amid the uncertain trade conditions in North America. We expect the CB will be cutting its policy rate constantly during most of the year. Indeed, there is much uncertainty about the MPR's 2025-end position, given risks of regional protectionism and lingering inflationary pressures; still, we anticipate the policy rate will close the year near 8.00%.

• Next MPC meeting: 17 - 18 February 2025
• Current policy rate: 27.5%
• EmergingMarketWatch forecast: 27.5%

The CBN has scheduled the first 2025 meeting of the MPC for Feb 17 and 18, initially meant to be held on Jan 27 and 28. This comes as the statistics office is set to release rebased CPI figures at the end of this month. At the Nov 2024 meeting, the MPC raised the monetary policy rate by 25bps to 27.5%, marking the sixth consecutive hike in 2024. CBN governor Yemi Cardoso has consistently reiterated the bank's commitment to addressing inflation and achieving price stability. Inflation hit a 28-year high of 34.6% in Nov. Dec inflation figures are expected this week but the National Bureau of Statistics has announced it will rebase CPI for Jan's data release later this month by updating the price reference period to 2024. Rebasing the CPI is expected to result in a lower reported inflation rate, due to adjusted weights of the updated basket. A lower inflation rate may reduce the urgency for the CBN to maintain a tight monetary policy, potentially leading to a more accommodative stance. However, while the rebased CPI may show a lower inflation figure, the underlying economic pressures of high food and energy costs persist. Speaking at the annual Bankers' Dinner on Nov 29, governor Cardoso hinted that the MPC intends to evaluate the impact of prior policy measures. He stated that the full effects of monetary policy typically take 6-9 months to materialize. We believe that the MPC will hold the policy rate at the Feb meeting, in order to evaluate the course of action following the release of Dec and Jan CPI outcomes. We will provide another update closer to the meeting. Should food and energy inflationary pressures begin to subside, we believe the CBN is likely to begin its monetary easing cycle at the second or third MPC meeting of 2025.

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The naira is expected to stabilize in 2025, building on reforms and economic adjustments initiated in 2024. Key drivers of this expected stabilization include cooling inflation, with government targeting a decline to 15% by the end of 2025. Additionally the recapitalization of Nigerian banks is expected to strengthen the financial sector. Progress in exchange rate unification through the CBN Electronic Foreign Exchange Matching System (EFEMS) has improved transparency and reduced reliance on parallel markets. Additionally, through the Dangote Refinery and revitalized state refineries, increased oil production is expected to increase foreign exchange earnings. Diversification efforts, such as boosting non-oil exports and a bilateral minerals agreement with France, should further support the naira's recovery. However, risks remain including volatile global oil markets, inflationary pressures, rising debt servicing costs and potential speculative activities. The naira's stability depends on the effective implementation of economic reforms and the management of external challenges.

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Several experts and organizations have recently weighed in on whether the CBN should continue or halt its rate hikes. Uche Uwaleke, a finance professor and former CBN deputy governor, emphasized the importance of balancing inflation control with economic growth. While acknowledging the need to tackle inflation, he cautioned that over-tightening could harm key sectors and stifle overall growth. Similarly, the director-general of the Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf, expressed concerns about the impact of higher interest rates on businesses. He argued that making capital more expensive could limit investment, ultimately slowing down economic activities. Meanwhile, the African Development Bank (AfDB) suggested that while the CBN should remain vigilant about inflation, it must also consider the broader economic recovery trajectory. It has advised the bank to be cautious with rate hikes, recommending a strategy that aligns more closely with structural reforms aimed at boosting productivity and reducing reliance on monetary policy for economic stabilization. The CBN has not yet released the MPC's personal statements for the November meeting which show how committee members voted.

Monetary Policy Committee Statement

Monetary Policy Committee Meeting Schedule

• Next policy meeting: March 10, 2025
• Current policy rate: 12.0%
• Last decision: Cut by 100bps (January 27, 2025)
• Our forecast: Cut by 50-100bps
• Rationale: Benign inflation outlook and external sector stability to prompt another, but likely smaller, rate cut

The State Bank of Pakistan (SBP) on Jan 27 cut the policy rate by 100bps to 12.0%, the lowest since March 2022. It was the sixth straight cut in the key rate, bringing total reduction to 1,000bps since June 2024 when the policy rate was at an all-time high of 22.0%. The decision, which was in line with market expectations, was underpinned by easing price pressure and the country's comfortable external position. Despite a sharp moderation in inflation, the rate cut of 100bps was smaller than seen in the previous three rounds. The central bank justified the "cautious monetary policy stance", noting that it is crucial to ensure price stability.

In a bid to achieve the inflation target of 5%-7% on a durable basis, the SBP stressed on keeping the real interest rate "adequately positive" on a forward-looking basis. This has been recommended by the IMF as well. Thus, we believe that the current easing cycle has almost come to an end, given that the global lender projects inflation at 7.8% in FY26. Having said that, there might be some room to cut the policy rate by another 50-100bps, which is likely to be delivered in the March meeting.

Inflation environment

CPI rose 4.1% y/y in December, the lowest since April 2018. The SBP attributed the downtrend to weak domestic demand conditions and supportive supply-side dynamics as well as favourable base effects. Inflation is expected to moderate further in January before inching up in subsequent months, especially from May onwards when the impact of the favourable base effect will phase out. The central bank, however, pointed out that underlying price pressure remains elevated, with core CPI (in rural areas) rising 10.7% y/y in December, although gradually easing from a record 27.3% y/y in Sep. 2023.

In light of recent readings, the SBP sharply revised down its average inflation forecast to 5.5%-7.5% in FY25, from 11.5%-13.5% predicted in July 2024. The forecast is upbeat compared to that of the IMF, which in October projected inflation at 9.5% in the ongoing fiscal year. During Jul-Dec FY25, inflation averaged 7.2% y/y compared with 28.8% y/y in the same period last year.

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External sector

The SBP's optimism regarding the near-term outlook for Pakistan's external sector strengthened further as it said the current account (CA) may post a slight surplus in FY25. Supported by strong workers' remittances and export earnings, the CA has been in surplus since August, clocking in at USD 582mn in December after reaching a nearly decade-high of USD 684mn in November. As a result, the central bank upgraded its projection for CA, which is now expected to remain between a surplus and a deficit of 0.5% of GDP in FY25, revising it from the 0-1% deficit estimated earlier.

The SBP expressed confidence that its foreign exchange reserves are likely to exceed USD 13bn by June, in large part driven by an improvement in net financial inflows. The reserves have seen a decline in recent weeks on the back of external debt repayments. As of Jan. 17, they stood at USD 11.45bn, the lowest in nearly two months. The central bank said that a sizable part of debt repayments (USD 6.4bn out of USD 10bn, according to the SBP governor) has already been made.

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GDP growth

The SBP said that economic activity continues to show gradual improvement, as evidenced by an increase in sales of cars, fuel and fertilizer as well as a pick up in import volume and credit disbursement to the private sector. With regard to a continued contraction in industrial output, the central bank said that the downtrend is led by a few low-weight items, such as furniture. In contrast, key industrial sectors - such as textile, food and beverages, and automobiles - have shown noticeable improvement. Nevertheless, it appeared a tad downbeat regarding GDP growth in the ongoing fiscal year following Q1 data, which showed 0.9% y/y growth, the lowest in five quarters. The central bank projected the economy to expand between 2.5-3.5% in FY25. Earlier, it expected growth to be in the upper half of the projected range.

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Conclusion

The sharp deceleration in inflation has prompted an aggressive reduction in the policy rate. In just a matter of over seven months, the SBP slashed the benchmark interest rates by 1,000bps. The current monetary policy easing is now nearing its end. We expect the central bank to cut the key rate by 50-100bps in March before calling it a day, given that it is determined to keep the real interest rate on a forward-looking basis adequately positive. In an interview with Bloomberg following the latest policy meeting, SBP governor Jameel Ahmed said that easing prices and lack of pressure on the external account give the central bank confidence to "revise (the policy rate) slightly down".

Useful Links

Previous policy rate decisions

Latest IMF report on Pakistan

• Next monetary policy meeting: Feb 20
• Current policy rate: 5.75%
• EmergingMarketWatch forecast: Hold or 25bp cut
• Rationale: Comments by Governor Remolona; CPI data for December and BSP's comment

We think that a hold decision and another 25bp policy rate cut are both distinct possibilities for the Feb 20 meeting of BSP's Monetary Board (MB). The BSP has made three consecutive 25bp policy rate cuts at the last three MB meetings for 2024. The latest meeting was held on Dec 19 and the key rate was reduced to 5.75%.

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On the same day, BSP Governor Eli Remolona said that the easing will continue in 2025, but a total policy rate reduction by 100bps in the year is perhaps too much. The BSP will be open to another policy rate cut at its first meeting for 2025, he said a day later. There will be six monetary policy meetings this year. The Philippine central bank is neither more nor less dovish and is more or less on the same trajectory going forward. He also said that the policy rate remains somewhat restrictive.

Inflation

CPI inflation speeded up to 2.9% y/y in December from 2.5% y/y in November, the statistics office said on Tuesday. The inflation target range is 2.0-4.0%. The CPI rose by 3.2% in 2024, a significant improvement from 6.0% growth in 2023.

The December headline inflation is within the central bank's month-ahead forecast range of 2.3-3.1% y/y. In a statement published on Tuesday, the BSP said that the latest reading is consistent with its assessment of a manageable inflation environment over the policy horizon. However, the central bank will keep monitoring closely emerging upside risks to inflation. Going forward, the monetary authority will maintain a measured approach to monetary policy easing to ensure price stability consistent with balanced and sustainable economic and employment growth.

Economic growth

On Dec 19, the MB said that domestic demand will likely stay "firm but subdued." Easing inflation and improving labour market conditions are expected to support private domestic spending. There are external downside risks to economic activity and market sentiment, the press release said.

The IMF forecasts that GDP growth in the Philippines will accelerate from an estimated 5.8% in 2024 to 6.1% in 2025 and 6.3% in 2026, the IMF said after concluding the 2024 Article IV consultation with the country in December. Growth in 2024-2025 is expected to be supported by disinflation and gradually decreasing borrowing costs as monetary policy normalizes. The IMF estimates potential output to be between 6.0% to 6.3% over the medium term. The risks to the near-term growth outlook are to the downside.

LFS unemployment

The unemployment rate was 3.2% in November, down from 3.9% in October and 3.6% in Nov 2023, according to the results of the latest labour force survey (LFS) announced by the statistics office on Wednesday. In the y/y comparison, the number of unemployed fell by 9.3% y/y to 1.66mn in November. The number of employed edged down 0.2% y/y to 49.54mn. The labour force hence dropped by 0.5% y/y to 51.20mn.

The labour force participation rate (LFPR) among Filipinos 15 years and older was 64.6% in November, higher m/m, but lower y/y.

NEDA Secretary Arsenio Balisacan said that the Philippine labour market remains robust and cited consistently high employment rates and reduced underemployment. The next step is to boost business and employment opportunities so that more Filipinos actively and productively contribute to the economy, according to him.

Exchange rate

The peso is trading at USD/PHP 58.508 at the time of writing, which compares with USD/PHP 59.076 on Dec 19, the date of the previous MB meeting.

Governor Remolona said on Dec 20 that the central bank has been more active than usual, "but not that active" in the foreign exchange market. The main concern of the BSP is a potential pass through from peso's depreciation to inflation.

Further reading

Press release after December 2024 monetary policy action

Schedule of monetary policy meetings

Highlights of MB meetings on monetary policy

Monetary Policy Report

• Next MPC meeting: Feb 4-5, 2025
• Current policy rate: 5.75%
• EmergingMarketWatch forecast: 5.75%

Rationale: The Monetary Policy Council continues to be united in that rates should remain on hold for the next few months, though it does appear there is a new division on the council into those that believe rate cuts might be able to start in July and those that see a later timing, and even not until 2026. We continue to believe that July is a realistic start to the easing cycle since all the pieces should be there. But any decision to allow energy prices, say, to rise later in H2 might delay a cut into the latter parts of Q3 or even later. It can't be ruled out the MPC will want to see July inflation before moving as well.

Ludwik Kotecki and Henryk Wnorowski have both come out and said that the council might be in position to lower interest rates for its July sitting. This is in part as that month's meeting should answer a lot of questions. One of the biggest, and the one NBP and MPC head Adam Glapinski appears most fixated on, is whether power prices will rise in Q4. The government extended the core power price cap at PLN 500/MWh until end-Q3, choosing not to allow the cap to expire at end-2024 (which was the original plan). Glapinski has said that the ending of the cap, if tariffs were held at current levels, would mean a 13% rise in prices that would up CPI inflation by 0.7pp.

But the government's legislation also says that energy companies have to apply for new tariffs in Q2 and to go into effect in H2, even though the regulator URE approved the current tariffs (PLN 623/MWh) in late June 2024 for H2 2024 and all of 2025. Finance Minister Andrzej Domanski has said that the money exists to extend the power price cap to end-2025, but a decision will be taken depending on where tariffs go. The URE needs to decide on tariffs by Jun 17 for them to go into effect on Jul 1 (it can always delay the decision, though, and then the tariff changes would go into effect 14 days later). We continue to believe that if tariffs aren't close to the power price cap, the government will simply extend the cap. Politically, the ruling coalition simply will never be in position to allow for a big power price jump.

There are other energy-related questions. One is that the so-called capacity fee in power prices will return on Jul 1. It has been waived since H1 2024 and to end-H1 2025. Glapinski says this will boost power prices by 8%, adding 0.4pp to inflation. But here one needs to remember that the base for July 2025 is very low since the anti-inflation measures for power, natural gas, and heating were partially lifted in July 2024. If the capacity fee did not return, the base would mean the contribution of power to CPI inflation would go from zero to -0.8-0.9pp in July, helping sharply bring down headline inflation. The return of the capacity fee will lower the downward contribution to -0.5pp or so, but this will still mean inflation will slow sharply in July. The URE will also decide on natural gas tariffs for H2, and this decision likewise should be known by mid-June or so. This does mean in the end that inflation should still peak sometime in H1 and then be slowing by the beginning of H2.

The MPC does seem sensitive to the presidential election. Glapinski has seemingly gone into campaign mode and if one reads between the lines of his presser, the ruling coalition is to blame for the return of inflation and the wide fiscal deficits, both items it at least in part inherited. It is hard to believe that Glapinski is effectively chastising the coalition for removing price controls that distort inflation rather than applauding their removal, but his tendency to take political sides opened the door to the coalition to try to take him to the State Tribunal. Regardless of the truth of any of this, the presidential result will be known likely on Jun 1, when the runoff is likely held between the Civic Coalition (KO) and Law and Justice (PiS) candidates.

The impact of the Trump administration should likewise be clear by July (i.e., on trade and Ukraine), and the MPC will have the next update to the CPI and GDP projections in July (after the March update). The outlook for fiscal policy also might be clearer as the government will likely wait until after the presidential election to detail any fiscal consolidation efforts.

Overall, we continue to believe that conditions should allow for a cut in July 2025. There is of course the potential for surprises, but inflation should be on the downward path by then. If inflation looks stickier than expected, one can't rule out that the MPC might want to actually see where inflation goes in July to gauge the impact of the capacity fee's return and how inflation is beginning H2. That could push the cut back to the September sitting (since there's no sitting in August), though as long as inflation has come down in June, July will remain open.

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: Jan 23, 2025
• Current policy rate: 47.5%
• EmergingMarketWatch forecast: Cut by 250bps
• Rationale: Improvement in annual inflation gives CBT room to keep monetary policy easing

We expect the CBT to continue to ease its policy rate at the January meeting, potentially by 250bps, based on the latest rhetoric. The MPC meeting held in December indicated that Q4 data showed ongoing moderation in domestic demand, bolstering the disinflationary outlook. The committee also noted that core goods inflation remained subdued, while improvements in service inflation became increasingly pronounced. Although unprocessed food inflation moderated in December following elevated levels in the preceding two months, the MPC emphasised persistent risks to the disinflation process due to ongoing challenges in inflation expectations and pricing behaviour.

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In its evaluation of monthly price developments, the MPC explained that core goods inflation stayed low and monthly price increases in services remained modest, further mentioning that November saw the lowest monthly price increase in the services sector in three years. Excluding rent, services rose by less than 3% m/m, reflecting a partial correction in periodically adjusted items and relatively stable demand in segments with higher sensitivity, it added.

December's better-than-anticipated data, along with improvements in services-sector inflation, is poised to grant the CBT additional latitude for further rate cuts, in our view. Given its ability to observe leading indicators for January inflation before its meeting, the Bank is likely to maintain its easing trajectory absent any significant surprises, in our opinion. Favourable market conditions, including a 30% increase in the minimum wage and a resilient lira, similarly bolster this outlook, in our assessment. Moreover, D-PPI remained below 2% since May and stayed below 1% over the past two months, underscoring a positive trend, further supported by stable intermediate goods and energy prices. Against this background, we do not expect January inflation to exceed the Jan 2024 print of 6.7% m/m, which should keep annual inflation below 44.4%. Thus, we think this environment offers ample room for the CBT to trim interest rates by 250bps, while still preserving positive real rates.

Summary of December rate-setting meeting

MPC rate decision in December

Quarterly Inflation Report for Q4

Monetary policy strategy for 2025

• 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.

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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: Jan 31
• Current policy rate: 9.50%
• EmergingMarketWatch forecast: 25bps cut
  

BanRep is expected to maintain a cautious approach to interest rate cuts in the upcoming sitting, marking the final session for the current board before two members get replaced. This will be the last meeting for the hawkish board members Roberto Steiner and Jaime Jaramillo, who were part of a board majority that consistently emphasized the importance of fiscal stability, and in recent years guided monetary policy according to the risks posed by the current government's fiscal policy approach. We expect their final vote to reflect their hawkish stance. President Gustavo Petro has already appointed their replacements.

During the last meeting, the board surprised the market by implementing a 25bps rate cut, marking a shift to a more gradual pace compared to the previous string of cuts of 50bps. The decision was primarily influenced by fiscal risks, identified as key factors requiring slower easing. These risks were linked to the exchange rate depreciation, uncertainty surrounding the minimum wage increase, and rising regulated prices.

Conditions remain unchanged, so caution is expected to prevail at this meeting. New factors, including the Fed's pace, the diplomatic crisis between Colombia and the US, and emerging uncertainties surrounding the 2025 budget linked to the declaration of Internal Commotion, add complexity to the scenario. Analysts polled by BanRep forecast a 25bps cut for the upcoming sitting.

Overall, we believe the most probable scenario is that the board will opt for another 25bp rate cut during the first meeting of 2025. With new members joining in February and participating in their first policy decision in March, the outlook could change if they show greater alignment with the government's priorities, as the finance minister suggested. However, uncertainty remains, as BanRep members have expressed confidence that the central bank will uphold its independence and constitutional mandate.

• Current policy rate: 4.50%
• Next monetary policy meeting: Feb 24, 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 decisions. The easing in the geopolitical risks after the signing of the truce with Hamas, however, have increased the expectations that an easing monetary policy might start earlier than expected and its scope might be broader than earlier thought. BoI governor Amir Yaron repeated after the Gaza ceasefire was in place already that there might be 1-2 rate cuts this year and that this is likely to happen in H2. However, some experts have started factoring in rate cuts already in April and believe that there might be 1-3 reduction in the policy rate by the end of the year. We find such scenarios plausible if inflation surprises on the downside. On the one hand, tax hikes should push inflation up and Yaron has said it might reach as high as 4% in early 2025 but on the other hand, a stricter fiscal policy should constrain private consumption and ease the upward pressure on prices, in our opinion. Moreover, foreign airlines have started returning to the country, which should increase competition and reduce ticket prices. We note that private consumption growth last year was partially explained by the significant decrease in foreign vacations. The latest developments resulted in a NIS strengthening and if sustained, it could push inflation lower. Some positive impact might also come from the possibility Turkey to renew foreign trade with Israel.

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Yaron also confirmed that it is possible the easing to start earlier than H2 if inflation surprises positively but it is possible the moves to be delayed if inflation proves to be stubborn. He said that the monetary policy would remain cautious as there are still large uncertainties and challenges ahead. The BoI did not change the rhetoric after the first rate sitting this year in early January but we think that the statement changed slightly to less hawkish and officials no longer mention possible rate hikes. The MPC 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. The BoI research department started factoring in 1-2 rate cuts this year while in the previous forecast update, the assumption was for no change in the policy rate by October 2025. We recall that this is not a guidance or a projection of the MPC but has most likely been endorsed by the policy makers.

Inflation moderated further to lower-than-expected 3.2% y/y in December but it has been above the 1-3% target range in the past six months. The latest inflation expectations, one of the major considerations the MPC is looking at when deciding on the policy rate, pointed to some moderation as well. The BoI expects inflation to climb to 4% in early 2025 also because of tax rate hikes and then moderate towards the upper limit of the target band in H2. The rate-setters see supply constraints easing to respond slower than demand. The BoI still sees inflation forecast tending to the upside. It says geopolitical developments and their impact on economic activity, prolonged supply constraints, volatility of the shekel, and fiscal developments are pro-inflationary risks.

Economic activity rebounded by above-expected 4.0% 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 might risk pumping up inflation if it decides to soften the monetary policy stance now, we think. The BoI revised slightly up GDP growth projections by 0.1pp to 0.6% in 2024 and by 0.2pps to 4.0% in 2025 and voiced expectations for further growth acceleration to 4.5% in 2026. The upward revision in 2024 came from stronger recovery in December after the ceasefire with Hezbollah was reached and advanced car purchases at the end of 2024 due to tax hikes as of 2025. In 2025, the decline in intensity of fighting in the north and the slightly more expansionary fiscal policy than previously thought, will push up growth more than previously expected, the research department explained. We think that the truce with Hamas reached in mid-January could result in even slightly higher growth this year as the BoI forecast assumes fighting to have continued in the entire Q1 albeit at lower intensity.

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: Mar 7
• Expected decision: hold

The NBK kept the base rate on hold (15.25%) at the Jan 17 meeting. We considered this a more likely scenario, even though inflationary pressures increased recently and now create greater scope for caution. Predictably, the central bank continued to highlight domestic utility tariff hikes, fiscal stimuli, and household inflation expectations as concerns. Its decision was also based on the acceleration of CPI inflation in December as well as consistently elevated core inflation throughout H2 2024. Pressures rose further as a result of the tenge's depreciation, which the NBK noted as well.

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With regard to external developments, the greatest inflationary risks are related to inflation dynamics in Russia and global food prices. The NBK also expects tighter monetary conditions in developed economies for the time being. It will present its next macro forecasts in March, though for now its analysis is that inflationary factors will remain dominant, both internally and externally. At the same time, we note the bank has now introduced extra measures that will prop the tenge. As of today, the average USD/KZT rate has dropped below 522, having exceeded 530 recently.

Assuming long-lasting stabilisation, the moderation of exchange rate pressures will be a positive factor affecting the NBK's decision-making. Its next rate-setting meeting is scheduled for Mar 7 and it has said monetary tightening will be considered as the medium-term inflation target (5%) remains a priority. At this stage, our baseline scenario is for an on-hold decision again, presuming that the balance of inflationary factors will not worsen dramatically.

• Next policy meeting: Feb 25
• Current policy stance: 3.00%
• Our forecast: Cut by 25bps
• Last decision: Hold (Jan 16)
• Rationale: Normalization of state affairs and less volatility in FX market to allow BOK to resume easing

The Bank of Korea is very likely to resume doing rate cuts in February or April as the central bank will try to avoid a more substantial economic slowdown later on in 2025, in our view. At the same time, the political situation has started to stabilize in January under the leadership of acting President Choi Sang-mok, which has reduced volatility in the FX market and will allow the BOK to cut rates without triggering further won selloff. The rationale force for our forecast is Bank of Korea's downgrade of the 2025 growth forecast to 1.6%-1.7% from 1.9% previously expected. In addition, the BOK gave a clear guidance in its January meeting when it said that all six monetary policy board members expect the central bank to cut rates over the next 3 months.

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We remind that the BOK decided to keep rates unchanged in January, citing the elevated political risk in the country and the heightened uncertainty in financial markets and the economy. January's decision came after back-to-back 25bps rate cuts in October and November. Going forward, we think that the BOK is likely to do one more 25bps rate cut over the next 3 months, with February being the more likely date of rate cutting as the economy seems to be in dire need of additional support.

Recent economic data has shown slowing growth momentum after exports fell by 5.4% y/y in the first 20 days of January. In addition, consumer confidence has been affected greatly by the political crisis that erupted in December, even though some recovery has been observed in January. Overall, the slowdown in exports and the further weakening of consumption give a very compelling reason to BOK to start easing, provided that the central bank feels certain that the exchange rate will remain stable. When it comes to the exchange rate the USD/KRW rate has fallen to around KRW 1,430 per USD as of Jan 22 after reaching a peak of KRW 1,480 in late December. That said, the exchange rate still remains above the key KRW 1,400 level which was broken in early December.

When it comes to inflation, CPI inflation remains muted at 1.9% y/y as of December, but headline inflation has accelerated somewhat over the past 3 months. Going forward, CPI inflation may accelerate yet again in early 2025 partially on the back of FX pass-through effects. With regard to the former, BOK estimates that ifthe exchange rate remains at KRW 1,470, this year's inflation rate will rise by 0.15pps from the previous forecast of 1.9% to 2.05%,according to comments made byBOK's governor Rhee in the meeting on Jan 16. Still, we don't think that inflation will be much of a concern for the BOK in the near future as headline inflation remains very close to the 2% target.

MPC meetings calendar 2025

Minutes

Previous MPC decisions

MPC board members

• Next policy meeting: March 6, 2025
• Current policy rate: 3.00%
• Our forecast: Hold
• Last decision: Hold (January 22)
• Rationale: Maintaining status quo on the policy rate is deemed crucial to strike a balance between sustaining growth and managing an expected rise in inflationary pressures

As widely expected, Bank Negara Malaysia (BNM) on Jan. 22 left its overnight policy rate (OPR) unchanged at 3.0% in its first policy meeting of 2025. The decision was underpinned by muted price pressure and the need to sustain growth momentum, with the central bank considering its current monetary policy stance supportive of the economy. It was the tenth meeting in a row that the benchmark interest rate was kept steady - the last adjustment was carried out in May 2023 when the OPR was hiked by 25bps from 2.75%.

Inflation environment

CPI inflation eased to 11-month low of 1.7% y/y in December, led by a slower gain in the cost of non-food items and services. Underlying price pressure also showed signs of easing, with core inflation rising 1.6% y/y, the lowest in nearly three years. Both headline and core inflation averaged 1.8% in 2024, down from 2.5% in the previous year. BNM reiterated that inflation is likely to remain "manageable" in 2025, amid easing global cost conditions and the absence of excessive domestic demand pressures. Moreover, it also struck an optimistic tone regarding the planned rationalization of RON95 subsidy, noting that the impact of the policy, which will be rolled out in the middle of 2025, is likely to be contained. It is noteworthy that PM Anwar has assured that 85% of the population would continue to enjoy the subsidy.

While BNM did not provide forecast for inflation, the government projects inflation to pick up to 2.0%-3.5% this year. Besides the removal of blanket subsidy for petrol, other factors that might put upward pressure on CPI include a hike in excise tax on sugar drinks, higher electricity tariffs from July, sales and services tax expansion, mandatory Employees Provident Fund (EPF) contributions for foreign workers and wage-price pass through due to the increase in minimum wage.

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GDP growth

BNM forecasts economic activity to sustain its strength in 2025 after GDP growth rebounded sharply to 5.1% in the previous year from 3.6% in 2023. Domestic expenditure was seen a key driver of growth, as household spending was expected to remain solid on the back of employment and wage growth as well as hike in minimum wage and civil servant salaries. Moreover, the central bank said that exports are likely to maintain uptrend, aided by the global tech upcycle, continued growth in non-E&E goods and higher tourist spending.

BNM also stayed mum on GDP growth forecast. The government projects growth at 4.5%-5.5% in 2025, a prediction that is in line with the IMF's 4.7% and World Bank's 4.5% projections for this year.

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Exchange rate stability

BNM reiterated its earlier stance that the movement in ringgit is primarily driven by external factors, namely uncertainty regarding the US' trade policies following Trump's election and the Federal Reserve's increasingly hawkish stance. The local currency has experienced bouts of volatility following the U.S. presidential election. After depreciating by as much as 3.8% against the greenback since Nov. 5 earlier this month, the local currency has pared some of its losses over the past few days. Before the polls, ringgit 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 central bank expressed optimism regarding the performance of ringgit over the coming months, noting that the narrowing interest rate differentials between Malaysia and advanced economies coupled with the country's favourable economic prospects and domestic structural reforms would strengthen the local currency.

Conclusion

All in all, we expect BNM to leave the OPR unchanged for the remainder of 2025, a projection which is in line with the consensus forecast, as it aims to strike a balance between sustaining economic growth and managing an expected rise in price pressures. Although the central bank has ruled out adjusting its monetary policy to prop up ringgit, maintaining status quo on the key rate is crucial to ease pressure on the local currency.

• Next MPC meeting: Feb 14, 2025
• Current policy rate: 6.50%
• EmergingMarketWatch forecast: Hold

Rationale: The NBR kept the key rate at 6.5% in its first MCP meeting in 2025, on Jan 15, and we think the same decision will be announced in the next meeting on Feb 14. The following meetings are not yet announced but we believe that the NBR will not consider cutting the key rate in H1. Inflation interrupted moderation trend in the last months of 2024 and even if base effects would resume the slowdown, the central bank sees it on a higher path than projected in the November 2024 Inflation Report. Moreover, the NBR sees considerable uncertainties and risks on the inflation outlook coming from the future fiscal policy, labour market conditions and wage dynamics, price developments in energy, food and oil markets

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Easing through rate cuts will probably be back on the central bank's agenda after assessing several factors like effects on prices of the government measures to reduce the fiscal deficit, the effects of a higher-than-projected food inflation caused by bad weather conditions in 2024, oil price developments and the expiration or extension of the energy price cap schemes this spring.

The next MPC meeting is on Feb 14 and we believe the rate will remain at 6.50%, cautiously keeping real rates in the positive territory and a tight monetary policy for longer, in a high-uncertainties context. Sticky service inflation, a considerably wide fiscal gap, higher-than-expected inflationary pressure in the food sector due to bad weather, high risks of energy price surges, robust wage rises and the potential upward trend of oil prices make us believe that the NBR would very probably remain prudent despite expectations of weak economic growth. Recent developments and elevated risks to inflation outlook come on top of a risky setting, with a high government deficit and uncertain fiscal policy stance.

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

To remind, the NBR cut the policy rate twice in 2024, in July and August, but that was not a start of a 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 later, like intensification of geopolitical tensions, a stronger deficit widening and bad weather conditions that kept the food inflation high. Hence, inflation forecasts were revised upwards and risks to the inflation outlook - upgraded to considerable.

• Current policy rate: 21.0%
• Next monetary policy committee meeting: Feb 14
• Expected decision: hold

The CBR surprised markets with an on hold decision on Dec 20 and our baseline scenario is for a longer period during which the key rate will remain at 21%. The CBR also changed the forward guidance to the weak version of a tightening bias, saying that it will assess the need for a rate hike at the next meeting depending on inflation developments. The major argument for keeping the key rate unchanged was that monetary conditions had tightened more than expected after the October hike and another hike in December risks making monetary policy too tight. This includes banks raising both deposit and lending rates more than implied by the October hike (partly in anticipation of another hike in December) as well as a marked decline in new lending for both households (an established trend now) and corporates (seen for the first time in November).

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We note that practically all other indicators pointed toward the need for another hike, especially the rising current inflation, but also high inflation expectations and the lack of indications for economic slowdown. As we said in our report ahead of the meeting, we see growing external pressure on the CBR to refrain from further tightening and it seems this factor played an important role for the on hold decision.

The CBR expects that tighter monetary conditions will eventually affect inflation and domestic demand, though it sees y/y inflation accelerating till April. The CBR will update its medium-term forecast only in February, so there is no specific number, but inflation is already approaching 10% (9.7% y/y as of Dec 23) and further acceleration means the CBR will accept much higher levels than previously thought, without further tightening.

Real sector data for November, released after the Dec 20 meeting, also do not provide evidence of economic slowdown. GDP growth actually accelerated to 3.6% y/y in November, the highest since May, while retail sales growth also picked up on the back of high wage growth and record low unemployment.

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

Consumer inflation in December accelerated to 3.0% y/y from 2.9% y/y in November. The advance was slower than the consensus market median projection for a rate of 3.2%. The acceleration was attributable to the increase in December fuel prices and to a smaller extent food prices. Significantly, the core CPI print remained unchanged at 3.6% y/y, also below consensus market expectations, signaling that underlying pressures remain subdued. The same message transpired from the very subdued owner's equivalent rent at 2.8% y/y in December.

Overall, the inflation rate remains benign in the final quarter of the year at an average of 2.9% y/y, once again undershooting the latest forecast of the central bank at 3.2% y/y. The outlook over the policy horizon remains favourbale. The central bank expects inflation to ease further this year to 4.0% and then remain close to the preferred 4.5% rate over the next couple of years.

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This will provide the necessary space for the central bank to ease the main policy rate by another 25bps on Thursday (Jan 30), following up on the 50bps cumulative cut delivered already in 2024. The market consensus is that the main interest rate will be cut to 7.5% on Thursday. However, the central bank will most certainly remain cautious of the risks.

The future interest rate movements will be highly data dependent. The uncertainties are abundant and it is difficult to see where the global inflation is headed and what would be the response of the major central banks. South Africa does not replicate the rate decision of the Fed domestically but as a small open economy, it is highly dependent on the developments in the major markets. The first interest rate announcement by the Feb since the inauguration of the new president is eagerly awaited on Wednesday (Jan 29). The Fed is widely expected to pause its rate-cutting cycle at this time, after delivering a full percentage point reduction last year.

Domestically, political tensions are brewing - the GNU is shaking and the MK is waiting on the sidelines for the proper time for a comeback. This could have major implications on the economy. We think the coalition partners are likely to find common ground and a solution for the sticking points for the time being. Although this coalition is a tense one, comprised of the two major rivalling parties, it has a very strong common objective that will continue to hold it in place until the next elections, in our view. We think the parties will likely come to the conclusion that the GNU could not implement the policies of the previous ANC government just as it could not implement the policies of the DA in full. They would have to find a mechanism under which policies such as the NHI and major changes in fiscal policies (such as a large-scale bailout for Transnet) get deferred to a time when there is a majority party in place. In summary, we are optimistic that the coalition government should be able to resist pressure to collapse. Nonetheless, the local currency is likely to remain vulnerable from both domestic and external pressures. This could make monetary policy decisions more challenging.

Monetary Policy Committee Statement, Forecasts and Assumptions

Monetary Policy Review

• Next Policy Meeting: Mar 26
• Overnight Policy Rate (OPR): 8.0%
• Previous Decision: Hold (Jan 29)
• Our Forecast: Cut, 25bps
• Rationale: Benign inflation provides sufficient headroom, GDP growth emerges as concern

Commensurate with our view, the Central Bank of Sri Lanka (CBSL) held its overnight policy rate (OPR) steady at 8% on Jan 29, during its first MPC meeting of 2025. We remind that CBSL in its Nov 27, 2024 meeting made a landmark decision to unify rates and establish the OPR. This unified rate replaces the dual system and now serves as the primary monetary policy tool. Alongside this change, the Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) have been aligned at 7.5% and 8.5%, respectively, maintaining a margin of ±50bps around the OPR. This structural shift reflects a more streamlined and accommodative policy approach, aimed at supporting the economy amidst persistent deflation and subdued activity levels. We expect the CBSL to cut the key rate by 25bps in March, in its next policy meeting, given the persisting deflationary trend and potential slowdown in the economy, owing to global headwinds.

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Inflation Trends

Sri Lanka's inflation dynamics have undergone a sharp shift, with deflation taking centre stage. In December, the Colombo Consumer Price Index (CCPI) recorded a 1.7% y/y decline, driven by falling prices for fuel, electricity, and gas. Meanwhile, the NCPI contraction deepened to 2% y/y in December. Short-term deflationary pressures are expected to persist, although inflation is projected to stabilise around the 5% target in the medium term. Core inflation, a measure of underlying demand, has also moderated significantly. The CBSL anticipates inflation will remain negative in the near term but turn positive by mid-2025 as fuel and transport costs stabilize and food prices recover, according to the latest monetary policy statement.

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Economic Growth

Sri Lanka's economy is gradually regaining momentum, with real GDP growing by 5.5% y/y in Q3 2024, accelerating from 4.7% y/y in Q2. The industrial sector spearheaded this recovery, posting a robust 10.9% y/y expansion, supported by utilities, chemicals, metals, and wood products. Agriculture experienced a 3.0% y/y growth, while the services sector reported growth at 2.6% y/y, with tourism-related industries such as accommodation and insurance showing stronger performance. The economic rebound has been bolstered by reforms under the IMF program and a robust tourism recovery, with 38% growth in tourist revenues in 2024. Despite these gains, delays in IMF fund disbursements could pose challenges in maintaining growth momentum. Q4 growth is likely to have surpassed expectations. Meanwhile, the government anticipates over 4% growth in 2025. However, global headwinds such as the threat of tariffs from the US, the Federal Reserve's policy moves and a potential slowdown in Europe heighten downside risks to growth.

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External Sector

The external sector has shown mixed outcomes. The merchandise trade deficit widened significantly in December. This was the largest trade deficit since January 2022, reflecting strong import growth. The trend is likely to persist in the near term as the government withdraws restrictions on vehicle imports. Meanwhile, exports continue to reflect gradual growth. An increase in tourism revenue and workers' remittances helped improve the external current account. The Sri Lankan rupee appreciated by 10.7% in 2024 but recorded a 2.0% YTD depreciation in early 2025. The successful completion of external debt restructuring, except for a small portion, in December 2024 has bolstered the country's external outlook. Gross Official Reserves (GOR) stood at USD 6.1bn at end-2024, including a renewed Bilateral Currency Swap facility with the People's Bank of China for three years.

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Outlook

The CBSL is likely to cut its rate in March, given expectations of economic activity moderating. The subdued inflation outlook will provide CBSL sufficient headroom to cut interest rates to ensure economic momentum is not lost. Further, uncertainties such as delays in fund disbursements, geopolitical risks, and fiscal policy shifts following parliamentary elections may influence future policy decisions. The CBSL is expected to remain cautious, balancing its focus on economic recovery with maintaining financial stability.

Further reading

Last MPC decision

Calendar of MPC meetings

• 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: 14.5%
• Inflation keeps accelerating
• Next rate decision: Mar 6

As generally expected, the central bank (NBU) on Jan 23 increased the key policy rate. This time the hike was more significant than in December, by 100bps to 14.5%. The second key rate increase since mid-2022 was due to faster than anticipated inflation acceleration. The NBU also increased its interest rates on overnight certificates of deposit to 14.5%, on three-month certificates of deposit to 17.0%, and on refinancing loans to 17.5%.

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Headline CPI inflation accelerated to 12.0% in December from 11.2% y/y in November. What is more, the NBU estimated that inflation kept accelerating also in January and forecast that it would peak only by mid-2025. Accordingly, the NBU said it would increase its key policy rate further to more than 15% in Q2 2025 and then cut it to 13% by end-2025. By then, the NBU now expects inflation to abate to 8.4%, up from the 6.9% forecast last October.

The NBU said high inflation was increasingly supported by fundamental factors, due to higher spending on raw materials, power and wages - the latter because of the personnel shortage triggered by military mobilisation and emigration. Disinflation in H2 2025, the NBU forecast, would be supported by better harvest, improvements in the energy sector, and a narrower fiscal gap. But in any case, much will depend on the course of Russia's war against Ukraine.