• This is a scenario in case no agreement is reached with the EC to exclude those expenses from spending limits
• There is already an effort from some member states to include decarbonisation spending in the EU escape clause
• Yet, the EC has been reluctant to classify nuclear power investment along with renewable energy projects
• The government can easily make the adjustment to local legislation, but it will risk having an EDP opened in 2028 when spending will start

The government considers taking financing of the expansion of the Dukovany nuclear power plant outside the fiscal framework, FinMin Alena Schilleova said during an event on Thursday (Jun 4). This is a scenario in case the Czech Republic fails to reach an agreement with the European Commission that would exclude these expenses from spending limits. The construction of two new units in the Dukovany nuclear power plant will cost about EUR 8bn each, which is a non-negligible expense. Yet, Schillerova insisted that it would be unreasonable to count that towards spending limits, considering that it was a one-off expense. Furthermore, the project allows phasing out power generation capacities that produce more carbon emissions, as well as improve energy security.

There is currently plenty of lobbying with the European Commission to include decarbonisation expenses in the EU's escape clause. Italy is reportedly pushing for such a change, and the Czech Republic supports the idea. Yet, it remains dubious whether the EC will agree to include the construction of nuclear power capacities along with renewable energy facilities. The current EC stance is that nuclear power capacities should serve as a transitional energy source, i.e. they will not need to be decommissioned, but they will not benefit from financial support currently provided to renewable energy projects. The Czech Republic has been among member states who want nuclear power to be reclassified as renewable energy, but this effort has not been successful yet.

Back to the financing issue, Schillerova said that the Czech government could use the so-called linear facilities, which would exclude the money spent on the Dukovany nuclear power plant from Czech spending limits. As far as domestic legislation is concerned, the government can easily implement that change, as it has the required majority in the lower house. However, the issue is whether the EC will recognise that change, as it could lead to opening an EDP if the EC decides these expenses are not exceptional. Schillerova mentioned that spending on the Dukovany expansion will start in 2028, and she hopes that an agreement can be reached by then.

While there is a domestic consensus about the Dukovany nuclear power plant expansion, the opposition is not on board with excluding public financial support from spending limits. It could open the door for uncontrolled fiscal relaxation, as there could be a temptation to count unrelated expenses towards the project, very similar to what has been happening with defence spending. Thus, the opposition sees such a change as a slippery slope. On the other hand, the government appears firmly decided to take this path, and use every opportunity to exclude Dukovany-related spending from future budgets. Given what happened with the 2026 budget law, which is technically not compliant with the fiscal responsibility act, we doubt there will be any consequences. The biggest risk remains related to the EC and the potential opening of an EDP in two years.

• Markets expected an increase of 5.1% y/y, while the CNB - 5.2% y/y
• There was a major downward revision of wage data in 2025, which explains the big discrepancy
• Using non-revised data, the wage print would be only modestly above market and CNB expectations
• Service sector wages led growth by a wide margin, and it was fairly broad
• It implies persisting pressure on service prices, and elevated core inflation for a while
• Yet, we don't believe the wage print will impact monetary policy, given the revision of 2025 numbers
• Thus, we still expect the CNB to keep interest rates unchanged in June

Real wages rose by 6.4% y/y in Q1 2026, easing from a 4.4% y/y increase in Q4 2025 (revised from 5% y/y), according to figures from the statistical office. The print was considerably above market expectations, which put real wage growth at 5.1% y/y. The print is also much stronger than the latest CNB staff forecast, which put real wage growth at 5.2% y/y. In defence of both markets and the CNB, the statistical office carried out some heavy revisions of wage data in 2025, with all growth rates decreased between 0.5pps and 0.7pps. As a result, full-year wage growth was downgraded from 4.6% to 4.0% in 2025. Without the revision, wage growth would be only modestly above expectations, as we calculate a nominal increase of 7.2% y/y in Q1, which is higher by only 0.2pps than the CNB forecast. Thus, wage growth was still a bit stronger than anticipated, but the discrepancy is effectively much smaller than the data suggests.

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As an additional note, median wage data will be temporarily unavailable, as the source data is no longer collected. The statistical office will restore median wage reports at a later time, likely when it switches to monthly wage reporting, using data collected from the new unified wage reporting for corporations that launched in April. Still, this likely means that median wage data will not be available before the beginning of 2027.

On a not so positive note, wage growth remained the most robust in the service sector, which was the main growth driver by a wide margin. Service sector wages rose by a nominal 8.3% y/y in Q1, faster by 2.1pps q/q. The stronger increase was broad, as the sectors that pushed it included administrative & support services, trade, education, real estate, and accommodation & food services. Interestingly, it appears that education wages grew mostly in the private sector, as public sector wages eased their growth to 5% y/y in Q1, slower by 0.6pps q/q. In any case, this means that service price growth is unlikely to ease soon, given that labour costs are the primary expense of service providers. Furthermore, the growth acceleration is fairly broad, which means the sector remains tight. The only other sector that pushed headline wage growth upwards was construction, with nominal wages rising by 12.6% y/y in Q1, faster by 4.2pps q/q.

These developments are not that surprising, sa employment continued to rise exclusively in services (up 1.0% y/y in Q1) and construction (up 2.4% y/y). Meanwhile, industrial employment fell by 0.6% y/y in Q1, which corresponded with a slowdown in nominal wage growth, from 7.2% y/y in Q4 2025 to 6.7% y/y in Q1 2026. Thus, the service sector remains fairly tight, and the odds are that strong wage growth will at least maintain service price growth elevated.

Monetary policy impact

While the wage print may appear as strongly supporting a rate hike, we should remind of the revision of 2025 data, as without that, the CNB forecast was fairly close. Thus, we expect that the latest wage data will not have a major impact on monetary policy. The CNB board will be certainly wary that wage growth remains robust, especially in the service sector. After all, service prices are a major component of core inflation, which means it will remain elevated for a while. However, we don't expect that the latest wage print will justify a rate hike on its own.

Instead, robust wage growth will likely keep interest rates at least at their current level longer than expected before the US-Iran conflict started. We continue to expect that price data will be the main indicator to watch, with wage data playing only a secondary role. As a result, we still expect the CNB to keep interest rates stable at its MPC meeting in June, though wages will be certainly brought up as generating domestic inflation pressure.

• Markets expected inflation to ease to 2.3% y/y, the print matched the CNB forecast precisely
• The slowdown was broad, including not only volatile prices, but also core inflation
• We estimate that core inflation eased to 2.8% y/y in May, slower by 0.1pps m/m
• We believe market speculations will be over after this print, as we see no reason why the CNB would deliver a rate hike in June
• While inflation risks are still there, and will likely materialise in H2, it makes more sense for the CNB to wait at least until August

CPI inflation eased to 2.1% y/y in May from 2.5% y/y in April, according to the latest flash estimate from the statistical office. The print was slightly lower than market expectations, which put CPI inflation at 2.3% y/y in May. However, it matched the CNB's forecast precisely, as the CNB projects headline inflation at 2.1% y/y in both May and June. Consumer prices rose by 0.1% m/m in May, slower than market projections of 0.3% m/m.

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The slowdown was relatively broad, as it reflected a slower increase or a faster decline across several categories. The prices of food & non-alcoholic beverages, alcohol & tobacco, and core goods all had a similar downward impact, and the rest was due to service prices. Food & non-alcoholic beverage prices fell by 1.9% y/y in May, faster by 0.6pps m/m, while alcohol & tobacco prices eased their growth to 3.7% y/y, slower by 1.5pps m/m. Goods' prices rose by 0.6% y/y, slower by 0.5pps m/m, and according to EmergingMarketWatch calculations, core goods (excluding energy, food, alcohol, and tobacco) rose by 0.7% y/y, slower by 0.5pps m/m as well. Service price growth eased as well, from 4.8% y/y in April to 4.7% y/y in May, even if it remains elevated. Finally, it appears that fuel prices fell broadly in line with our estimate, though probably slightly slower than the 0.7% m/m fall our proxy suggests.

Based on this, we estimate that core inflation likely eased to about 2.8% y/y in May, down from 2.9% y/y in April. This comes from the slight easing on both core goods' prices and service prices.

Monetary policy impact

We believe the flash CPI print settles the recent issue with markets pricing in a rate hike in June. While a revision of inflation data is not impossible, the flash estimates have been rather precise since they launched at the beginning of 2025, and we haven't seen any noticeable revisions yet. Thus, we have a situation where price growth has moderated a bit, and headline inflation is precisely in line with the CNB's forecast. Furthermore, there are no signs yet of second-round effects from the US-Iran war, even though these are still likely to arrive later this year.

Arguably, inflation risks have not disappeared, and they remain considerable for the second half of the year. However, based on communication from the CNB board so far, we see no reason for them to pull the trigger prematurely. Inflation data clearly justifies the cautious position of the CNB, which is why we expect that interest rates will remain unchanged at the MPC meeting on Jun 18.

Having said that, we continue to believe that rate hikes are inevitable this year. However, the flash CPI print reinforces our belief that a rate hike will not arrive earlier than the MPC meeting in August. We should emphasise that unlike the euro area, the CNB can still afford to wait a bit longer before tightening monetary policy. After all, when the MPC meeting in August is due, there will be much more price data available, like the final CPI print for July, as well as fuel price data for early August. Moreover, there will also be a new CNB staff forecast, and possibly the first official implementation of the new quantile regression forests model. Thus, it makes much more sense to us that the CNB will not rock the board in June, but remain patient.

Government proposes a cut in voluntary pension payments more than expected (Hospodarske Noviny)

Lowering payments, a lure for young people. Government presents a change in voluntary pension savings (Lidove Noviny)

Pension savings are changing, they will earn more money to people (Pravo)

With CZK 1.5mn at retirement. [FinMin] Schillerova launches a revolution in pension savings (E15)

Pavel is usually out of touch with reality. [Foreign minister] Macinka on NATO summit, China, and public TV licence fee (Mlada Fronta Dnes)

Nothing to prevent Okamura's fall. You cannot pretend to be a protest party when you take well-paid positions (Lidove Noviny)

Fight for billions of dollars from tariffs (Hospodarske Noviny)

NATO chief in Kyiv. Mark Rutte honours monument to fallen Ukrainians (Pravo)

Azerbaijan is offering more than oil to the Czech Republic. We are also holding an anti-Russian card, says an influential deputy from Baku (E15)

Crackdown against oligarchs is in full swing in Russia. State is confiscating assets on a massive scale (Mlada Fronta Dnes)

• Next MPC meeting: Jun 18, 2026
• Current policy rate: 3.50%
• EmergingMarketWatch forecast: hold

Rationale: Markets have started to price in a rate hike recently, but we still expect that the CNB board is not quite ready to pull the trigger. We see market expectations turning more hawkish, mostly because of the prospect of a longer disruption in supply chains due to conflict in the Middle East. Another factor may be euro area inflation, which remained elevated, thus raising the odds for the ECB to deliver a rate hike on Jun 11. Besides, price pressure has been mounting, as natural gas prices remain significantly higher than pre-conflict levels, and fertilizer prices for domestic producers have increased by about 18-20%.

However, economic data has remained benign, and high-frequency price data available for May does not suggest a major acceleration in inflation. Fuel prices are likely to ease modestly in May (we estimate a 0.7% m/m decrease), and electricity offer prices have remained largely stable. Agricultural producer prices fell by 10.6% y/y in April, the fastest in the past two years. There is a certain in-built buffer, as commodity delivery contracts are typically arranged 3 to 6 months in advance. However, the grace period is nearly over, which is why producers are increasingly nervous. The way we see the domestic situation currently is a sort of staring contest. No one wants to be the first to trigger a price hike first, but once someone does, everyone is ready to jump on the train.

Meanwhile, messaging from the CNB board has remained careful. In all fairness, the board has always allowed for a rate hike at the MPC meeting in June, and we expect that at the very least, a hike will be discussed in earnest. Yet, barring any unexpected sharp change in price data, we don't see a fundamental shift in prices occurring in May. Thus, if the state of the economy was enough to justify stable interest rates in May, we see no reason why it wouldn't do the same in June. For the sake of argument, this CNB board has been guilty of shifting views at the eleventh hour, arguing that new data had become available. We see enough people on the board indulging into such behaviour (Zamrazilova, Seidler, Prochazka, Kubicek), so a turnaround is very possible. However, we have seen nothing to support such a scenario, at least for now.

We should emphasise that this is based on the assumption of no sharp price growth in May. If inflation data surprises on the upside, particularly core inflation or food prices, then the odds of a rate hike will increase considerably. We see core inflation exceeding 3% y/y noticeably as one such trigger, as well as food prices rising by more than 2% m/m. Other indicators to watch would be service prices and agricultural producer prices, as both would indicate a coming inflation shock. In any case, we have been arguing since the start of the US-Iran war that rate hikes are inevitable this year, the only question being their timing. Thus, we still allow for a hike in June, though we consider a hike in August as more likely.

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Data Download

Further Reading:

CNB board statement from latest MPC meeting, May 7, 2026

Post-meeting press conference, May 7, 2026 (in Czech)

Q&A after the latest MPC meeting, May 7, 2026

Minutes from the latest MPC meeting, May 7, 2026

Monetary Policy Report, May 2026

Macroeconomic forecast, May 2026

Meeting with analysts, May 11, 2026

CNB board profile

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

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

• Cumulative sales reported an increase of 3.9% y/y in January-May
• Skoda Auto was the primary growth driver, its sales rising by 18.3% y/y in May and 12.4% y/y in January-May
• Petrol car sales led growth in May, up by 8.5% y/y
• The EV segment continued to expand quickly, and was behind cumulative sales growth
• Used passenger car sales increased by 9.9% y/y in May and 10.6% y/y in January-May

New passenger car sales rose by 10.4% y/y (wda) in May, adding up to 20,463 units, according to figures from the SDA, the car importers' association. In non-adjusted terms, sales rose by 4.8% y/y, but there was one fewer working day this May than a year ago. In cumulative terms, new car sales rose by 3.9% y/y (wda) in January-May, reaching 103,340 units. Skoda Auto was the make that drove sales growth in both periods, as its sales rose by 18.3% y/y in May and by 12.4% y/y in January-May. Skoda has increased its domestic market dominance lately, as its share was 37.7% of sales in January-May.

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By fuel type, petrol car sales performed the strongest in May, reporting an increase of 8.5% y/y. Diesel car sales increased by a strong 12.6% y/y as well, though the EV segment combined had a stronger contribution. Battery electric car sales were higher by 18% y/y, while plug-in hybrids reported higher sales by 21.9% y/y. Yet, the situation was still dominated by the EV segment in cumulative terms, as battery electric car sales rose by as much as 17.8% y/y, while plug-in hybrid sales were higher by 26.4% y/y. The EV segment reached a market share of 11.1% in January-May, higher by 1.6pps y/y. Diesel car sales rose by a decent 5.3% y/y in January-May, while petrol car sales increased by only 1.8% y/y during the period. Yet, petrol cars continue to dominate, as their market share was still 65.8% in January-May, though lower by 1.4pps y/y. The high price tag for electric vehicles remains a hindrance, which is why cars with internal combustion sold well in the past few months, despite higher fuel prices.

Used passenger car sales rose by 9.9% y/y in May, bringing their cumulative sales growth to 10.6% y/y in January-May. While used car sales have not been able to catch up with new ones, there has been some push to reduce expenses, which is why the used car segment has remained viable.

Total vehicle sales, including buses, motorcycles, tractors, trucks, and trailers, rose by 12% y/y in May, out of which new vehicle sales were higher by 12.5% y/y. In cumulative terms, total vehicle sales rose by 5.9% y/y, out of which new vehicle sales were higher by 6.8% y/y.

All in all, the automotive market has continued to do well, reflecting a willingness of households and businesses to purchase. Rising fuel prices have proven not to be a deterrent, and sales have actually increased. The EV segment continues to grow steadily, but at this rate, it will take until the end of the next decade to become a serious competitor to cars with internal combustion.

• Reducing reliance on fossil fuels, more investment in line with the NRRP, development of labour market are recommended
• The Czech Republic remains among member states who are not under an EDP and are not observed for macroeconomic imbalances
• There may be warnings from the EC in two years, reflecting fiscal performance in 2027 when fiscal expansion is expected to be considerable

The European Commission recommended reducing reliance on fossil fuels, as well as more investment in R&D and high-value innovations, according to its country-specific recommendation for the Czech Republic. It is part of the EC's Spring Semester Package, which assesses all member states. The Czech Republic remains in the group of member states that are not under an EDP, and do not have a special assessment for macroeconomic imbalances.

Regarding the country-specific recommendations, they continue to address some ongoing issues, such as the need to reform the labour market further, easing access of women and foreign nationals. There is also a recommendation to increase the number of students in STEM fields, as well as bet on innovative sectors. There are the traditional recommendations to boost the capacity of the public administration, as well as adhere to targets set in the National Recovery and Resilience Plan. The EC also recommends that the Czech Republic should stick to the maximum growth rates for net expenditure growth, while accommodating for higher defence spending.

At this point, we do not expect the Czech Republic to be under closer scrutiny by the European Commission. While a modest fiscal expansion is expected in 2026, it will be entirely within acceptable levels. The bigger issue will be 2027, as the government will implement most of its discretionary fiscal policy measures next year. Yet, given how the European Semester works, we expect that the first time there will be some warnings coming from the European Commission to be in two years, i.e. in June 2028. We still expect that this government will try to avoid having an EDP opened, but circumstances could work against it.

• Maximum petrol prices will fall by 0.6% d/d, while maximum diesel prices will rise by 0.2% d/d
• We expect that maximum fuel prices will start rising soon, given developments in global oil markets
• Fuel prices could still decrease by 2-3% m/m in June, having a small downward impact on CPI inflation

The finance ministry once again made only marginal changes to maximum fuel prices that will apply on Thursday (Jun 4), according to a press release. The price cap on petrol will fall by 0.6% d/d, while the cap on diesel will rise by 0.2% d/d. In week-on-week terms, it will make maximum petrol prices lower by 4.9% w/w, while maximum diesel prices will be lower by 3.3% w/w.

While the sustained decline is encouraging, we expect that it will soon end, as global oil prices have been rising again. Still, fuel prices fell noticeably in the first week of June, so if they don't pick up too much later in the month, we could still see a decline around 2-3% m/m. The impact from such a decline on year-on-year inflation will be between -0.10pps and -0.15pps in June. Yet, it will be likely a temporary relief, as the base for fuel prices was high in June and July 2025, after which prices eased. Thus, we may have a renewed upward pressure from fuel prices in Q3, assuming no major additional disruption happens to supply chains.

• The minimum monthly deposit will be lowered from CZK 500 to CZK 100, and state subsidies will reach 40%
• People turning 36 could do a one-time withdrawal of up to a third of the invested amount, without losing state support or paying taxes
• Investment in stocks will be allowed, with investments being rearranged into low-risk assets when savers turn 50
• We see this as a net positive for the pension system, as it could offload some burden from the pay-as-you-go system

The government came up with a new voluntary pension investment scheme aimed at people under 30, which will include state support, according to a presentation on Wednesday (Jun 3). The minimum required monthly deposit will be lowered from CZK 500 to CZK 100, and the state will subsidise 40% of the deposited amount. People will have the opportunity to withdraw one third of their savings once they turn 36, without losing state support, and the withdrawn amount will not be subject to personal income tax.

Moreover, there will be changes to the investment strategy for such accounts. For example, the government intends to ease the risk requirements, which allows investments in stocks, offering a higher return. Currently, pension funds are heavily restricted where they can invest, leading often to a low return, thus discouraging people from making pension savings. The idea is to allow a higher return until the saver turns 50, after which investments will be rearranged into lower-risk assets, providing some guarantee over the investment.

The final change is that management fees on such investment accounts will be capped at 0.5%. The only exception will be for mutual funds, where fees will remain unchanged.

The changes are clearly aimed to encourage pension savings, something the previous government didn't achieve much progress on. We believe the scheme has potential, but the government could extend it, as people over 30 are more likely to have the additional disposable income to start making such deposits regularly. Still, the main bet appears to be that parents will open investment accounts for their children, making the contributions for them. This could be a way to offload some burden from the pay-as-you-go pension system, though this scheme comes in addition to the current system. Still, if the scheme becomes popular, it could eventually lead to a reduction of the weight of the pay-as-you-go system, so we see it as a net positive for the pension system. Still, the scheme remains voluntary, so it will be up to the government to make it attractive enough.

• New corporate borrowing picks up again, outlook for private investment activity still uncertain, we note
• Interest rates on forint loans trend down, corporate EUR loan rates move up on ECB hike outlook
• Households maintain high monthly borrowing pace, fuelled mainly by subsidised housing loan programme

Lending activity maintained an upward trend in April as the outstanding stock of bank loans to the private sector picked up further to 11.9% y/y as of the end of the month, according to the monetary statistics of the National Bank of Hungary (NBH). The continued acceleration was expectedly on the back of the retail segment, while corporate loan growth eased slightly during the month. New loan volumes, however, suggested that corporate borrowing demand remained solid in April, we think. Corporate loans rose by 9.8% y/y in real, transaction-based terms, strengthening further after keeping a stable, elevated y/y dynamics in the previous three months.

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Data Download

Positively, the accelerating corporate loan growth was on account of both forint and forex-denominated loans. Non-financial companies borrowed net HUF 324.9bn of new bank loans in April, the second highest monthly volume since the start of 2023. New loan borrowing was mostly on account of forex-denominated loans by forint borrowing was also relatively high at HUF 109.5bn, which we consider a positive sign about a more broad-based upturn in corporate activity. The recent NBH lending survey, however, revealed that banks did not expect an improvement in demand for investment loans. We are therefore cautious to interpret the current upturn in corporate borrowing as a positive signal about investment propensity yet, but it could still mean favourable companies' expectations on the economic situation going forward.

Interest rates on forint corporate loans were little changed m/m, although some tentative downward shift was visible in the rates on large-scale forint loans. Interest rates on EUR-denominated corporate loans rose m/m in April, in our opinion based on expectations for rate hikes by the ECB.

Retail lending continued to accelerate in April, mainly supported by the subsidised housing loan programme. Retail loans rose by 15.7% y/y in real, transaction-based terms during the month, accelerating consistently since early 2025 or before the programme was launched. Households took out net HUF 222.7bn of new bank loans in April, keeping a steady monthly borrowing pace. Housing loans expectedly accounted for the main part of the total borrowing - HUF 169.7bn. The career start-up loan initiated by the previous government contributed further HUF 38.3bn to the total. Interest rates on housing loans continued to inch down in April and rates on personal loans also tended down during the month.

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• Seasonally-adjusted sales fall by 1.2% m/m
• Annual dynamics normalises after temporary boost from one-off bonus payments, we think
• Non-food sales weaken, food sales pick up and signal solid underlying trajectory of retail spending, in our view

Retail sales increased by 3.6% y/y in April, slowing from the 8.1% y/y growth in the previous month, the statistical office (KSH) reported. Seasonally-adjusted retail sales also retreated by 1.2% m/m, although the broader picture still suggested a gradual upward trend in retail sales since the trough in mid-2023. We think the slowdown in the annual print and the m/m decline in the seasonally-adjusted figure both reflected a high base effect from Feb-Mar. Large bonuses in the national security sector and additional pension bonuses were distributed in Jan-Feb, in our opinion creating a visible spike in household consumption in the subsequent months. We view the retail sales dynamics in April as a normalisation of retail spending after these one-off income transfers. We expect the general retail sales trend to remain slightly elevated compared to the average 2025 performance, based on the longer-lasting income stimuli implemented by the previous government before the elections. The fuel price caps will likely support household consumption as well, in our view.

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Data Download

Fuel sales slowed down visibly to 9.1% y/y in April. Their annual dynamics remained strong, in our opinion because households pulled fuel consumption forward under uncertainty regarding the duration of the fuel price caps. Non-food sales also moderated and contributed to the easing headline print. Non-food sales rose by 2.6% y/y and were considerably weaker than the prior trend, even excluding the temporary spike in March. Sales of manufactured goods in non-specialised shops stagnated y/y, while clothing sales started to decline y/y. The pullback in non-food consumption was quite broad, observed also in consumer durables and electronics, second-hand goods and mail orders, while pharmaceuticals was the only segment to maintain some momentum in April.

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Conversely, food sales picked up further and rose by 3.4% y/y during the month. We think the solid trend in food sales suggested that the underlying trajectory of household consumption remained solid and the weakness in the non-food segment in April was only a correction after the temporary boost in the previous months.

Energy market may open up to foreign interests again, profit-seeking multinationals may appear (Magyar Nemzet)

PM Peter Magyar holds talks with French President Emanuel Macron and makes important announcement regarding Ukraine (Magyar Nemzet)

PM Peter Magyar announces Ukraine's accession to EU (Magyar Nemzet)

Hungary no longer vetoes, PM Peter Magyar gives green light for Ukraine's EU accession - that is why it was urgent to reach agreement with Ukrainians on rights of Hungarians in Transcarpathia (Vilaggazdasag)

New energy corridors are being built towards Hungary, electricity will flow from other side of the world (Vilaggazdasag)

Scandal in Anita Orbán's ministry, foreign ministry employees have been sacked, executives of multinational companies have taken over management (Vilaggazdasag)

Now it will be decided whether Trump still loves Hungary: MOL asks America for immediate help - acquisition of Serbian NIS depends on it (Vilaggazdasag)

One-stop social administration, support for single-parent families - social minister Katai-Nemeth presents developments his ministry is preparing to implement with EU funds (Heti Vilaggazdasag)

PM Peter Magyar announces that agreement is reached with Ukraine on rights of Hungarian minority (Heti Vilaggazdasag)

Transport minister David Vitezy: We will purchase thirty-five new InterCity multiple units from EU funds (Heti Vilaggazdasag)

Hungarian government recalls three ambassadors (Heti Vilaggazdasag)

French President Emanuel Macron at meeting with PM Peter Magyar: We will strengthen French-Hungarian strategic cooperation in all areas (Heti Vilaggazdasag)

• Next MPC meeting: Jun 23, 2026
• Current policy rate: 6.25%
• EmergingMarketWatch forecast: Hold
• Rationale: MPC flags possibility of rate cuts, hold decision more likely amid inflationary risks

The outlook for the June monetary policy decision has become complicated after the MPC rate-setting meeting in May. The MPC kept the policy rate unchanged at 6.25% in May but clearly flagged the possibility of policy rate cuts. The MPC was divided between a cut and hold decision already in May, as some MPC members supported a rate cut, NBH governor Mihaly Varga revealed after the May meeting. The hold decision in May mostly reflected continued inflationary risks related to the geopolitical tension and the spike in global energy price hikes. Conversely, the rationale for rate cut was based on the strong appreciation of the forint exchange rate and the decline in the risk premium, following the win of the Tisza Party at the Apr 12 parliamentary elections. Financial markets have been bolstered by the prospects for unfreezing of most EU funds, amounting to EUR 16.4bn, as well as by the new government's promise to work for eurozone accession and meet all relevant criteria by 2030. Varga, as well as NBH deputy governor Zoltan Kurali, have insisted that the NBH should first make sure that the improvement in the risk premium was sustained, before moving towards policy loosening. The MPC will therefore wait for the updated NBH forecasts from the next Inflation Report in June before deciding on a policy shift, Varga indicated.

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Data Download

This could mean a probability for a cut already in June, since the MPC will have access to the NBH's updated Inflation Report already on its next meeting. We nevertheless believe that the MPC will rather opt for a cautious, hold decision, taking into account the prospects for more prolonged conflict in the Middle East. The outlook for rate hikes by some regional banks and the ECB could also constrain the MPC to cut the rates. The inflationary impact of energy prices has been contained by the fuel price caps for the time being, but the situation with the price caps is uncertain and they could be phased out in the course of the year, requiring the MPC to maintain a degree of caution regarding the inflation outlook, we believe.

The MPC maintained most of its policy guidance in May, including the need for cautious and patient approach. Rate decisions will be taken on data-driven basis after assessing data on the inflation outlook and financial market developments, it said. At the same time, the MPC noted that the decline in risk premia had to be verified whether it is sustained, which we read as a definite nod towards the possibility for rate cuts. Otherwise, the MPC expressed satisfaction with the inflation outlook, considering that it improved significantly. This assessment seemed to average both the upside and downside risks, we think, as the MPC pointed to the strong forint and the extension of the margin and fuel price caps on the one hand and the high global energy prices as an upside risk on the other.

Post-meeting MPC statement from May rate-setting meeting

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

Minutes from April MPC rate meeting

Inflation Report - Q1/2026

MPC meeting calendar 2026

• Budget expenditure is expected to exceed room provided by escape clause in 2024-2026
• Fuel price caps and other pricing restrictions should be abandoned
• EC recommends faster energy diversification, anti-corruption and public procurement reforms

The EC called for budget consolidation, expecting a significant slippage over the recommended mid-term fiscal path in 2026-2027, according to the package of policy recommendations included in the Spring European Semester. The EC estimated the fiscal stance to be expansionary at 0.4% of GDP in 2025 and expected the fiscal impulse to strengthen to 1.7% of GDP before returning to broadly neutral in 2027. Net budget expenditure growth deviated from the Council's recommendation by 0.8% of GDP in cumulative terms over 2024-2025, but this deviation was within the flexibility of the national escape clause for defence spending, it said. On the other hand, the deviation was projected to reach cumulative 3.0% of GDP in the 2024-2026 period, exceeding the room provided by the escape clause by 1.9% of GDP. At the same time, the EC called on the EC to strengthen defence spending and to restructure the budget so that it could maintain it at higher levels in the longer term.

The government should abandon the fuel price caps, the EC advised, saying that any measures to protect against high energy prices should be temporary and targeted at vulnerable households. State support should ensure incentives for energy savings and its cost should also fall within the budgetary room outlined by the EU fiscal rules, the EC underlined. It estimated that the fuel price caps should cost 0.1% of GDP to the budget in 2026 if they were maintained until the end of the year, which we think stemmed from the temporary cut in the excise tax on fuels. The government should also remove other pricing interventions, including the margin and interest rate caps to reduce market distortions and to ensure smooth transmission of monetary policy.

The EC advised the abolishment of other market interventions in the product and services markets, remove distorting taxes, strengthen the anti-corruption framework and ensure competition in public procurement. Energy supply diversification should be accelerated and fossil-fuel subsidies should be phased out, including these related to diesel excise taxes and subsidies hindering the electrification of the residential sector. Obstacles to the roll out of new renewable capacities should be lifted as well, it said. Improving the education effectiveness and access to quality healthcare and to active labour market measures were other reform recommendations.

• Glapinski says gold stock rises to 613 tons valued at PLN 324bn
• Glapinski says unrealized gains for gold are PLN 153bn

NBP head Adam Glapinski said Wed. that the central bank's continued push to amass gold had moved Poland into tenth position globally in terms of gold holdings, according to comments made at his monthly press conference. Glapinski said the NBP now had 613 tons, which would be up from 596 tons at end-April. The value of the gold was some PLN 324bn, he said, which would be up from PLN 322bn at end-April. In terms of the unrealized gains on the gold, Glapinski said the total was now some PLN 153bn. To note, that is down from the near PLN 200bn said in early March, when Glapinski floated the 'Polish SAFE 0%' idea alongside President Karol Nawrocki.

Glapinski said that the NBP's drive to hit 700 tons of gold would continue.

Overall, the NBP's gold-buying plan will clearly continue, which will boost the unrealized gain total. That sum, though down to closer to PLN 150bn rather than the PLN 200bn seen a couple of months ago, will tempt politicians. For now, it doesn't appear there will be any deal between the government and President Nawrocki, and so Glapinski will not sell gold to up profits to send to the government later for defense spending. To note, the current law would allow for the gold to be sold at will, but then the NBP would have to send the money to the budget and the government could do with it what it wants. In all likelihood, there won't be any deal to boost NBP profits before the autumn 2027 elections and rather the opposition Law and Justice (PiS), to which Glapinski and Nawrocki are close, will promise to use the money in 2028 and beyond. In fact, and considering that domestic debt safety thresholds could be crossed in 2028, one could see a PiS-led majority government using the NBP's unrealized gold profits to right the fiscal ship without having to implement real austerity. If the senior ruling Civic Coalition (KO) leads the next government, it might have a harder time since the NBP will not be so willing to help.

• Glapinski says that there's no reason now to change rates or even discuss rate changes
• Glapinski says current price shock is less impactful than in 2022 and than feared
• Glapinski says growth slowdown, higher rates, strong PLN, slow wages help keep rate flat
• Glapinski says below-consensus May CPI print reduces chance of hikes
• But he says that if inflation were to jump, the MPC would not hesitate to hike
• In the end, Glapinski says current rates are high enough to bring inflation down, but not so high as to block economic activity
• We believe Glapinski's comments increase chance MPC will keep rates on hold for some time

NBP and Monetary Policy Council chair Adam Glapinski said Wed. that the MPC remained in 'wait-and-see' mode as there was no reason now to change rates or to even discuss changing them, according to comments made at his monthly press conference. Glapinski said the inflation shock from the Middle East conflict wasn't as dangerous as that in 2022 or as bad as feared. This was in part, he said, due to the fact the war would also ease demand by slowing economic growth, the starting interest rate is higher (3.75% now vs. 2.75% in Feb-22), the PLN has remained strong, and corporate wage growth just slowed to the weakest pace in five years. That May CPI inflation came in at 3.1% y/y, down from 3.2% in April and well below the consensus forecasts, helped reduce the likelihood of rate hikes, Glapinski said.

Glapinski also said that if inflation were to jump, say, if the government ended its "costly" fuel-tax cut program and oil prices were to rise in a permanent manner, then the MPC would not hesitate to hike. It was ready to act, he said. That said, the NBP chair added that current rates were high enough in order to stabilise inflation going forward, but not so high that economic growth would be slowed.

Overall, Glapinski's comments were dovish in the end as they suggest the MPC, or he at least, is not overly worried about the level of inflation in the wake of the energy price shock and that he sees several factors insulating the Polish economy from faster inflation. Glapinski did suggest that the council could move towards a tightening bias quickly if oil prices were to remain high and the government ends its fuel-tax cuts, but a hike would also likely need core inflation to rise or wage growth to pick up or the zloty to weaken, or perhaps all three. Many MPC members have said July will bring a potential change to their view since the CPI and GDP projections will be updated, but Glapinski's comments today suggest the council might see the outlook better documented, but this won't herald a policy change and the likelihood is still that it keeps rates flat in the months ahead. The MPC doesn't sit in August, and so this probably does make the September meeting a key one. By then, the situation in the Middle East should be clearer and so should the outlook whether inflation is likely to jump or slow.

• OECD lowers GDP growth forecast from previous 3.4% for 2026 and 2.8% for 2027
• OECD sharply raises CPI inflation forecast to 3.7% for 2026

The OECD lowered substantially its real GDP growth forecast for Poland to 3.0% for 2026 from the 3.4% expected previously, according to updated forecasts published Wed. and compared with those released in December. The OECD also lowered its 2027 forecast to 2.6% from 2.8% before. The organisation said that growth would moderate based on headwinds from the evolving conflict in the Middle East, but be underpinned by a peak in EU-funded investments. It noted that the economy remained exposed to risks from further energy price shocks and global demand, as well as geopolitical risks in the region.

The OECD sharply raised its CPI inflation forecast to 3.7% for 2026 from the 2.9% forecast in December, though it kept its 2027 forecast at 2.7% (which is just above the NBP's central 2.5% target). The OECD chalked up the rise in inflation to the energy shock from the Middle East, but said it should unwind in 2027 and inflation will ease in that year. The OECD added that the government's fuel-tax cuts should be better targeted and phased out as soon as conditions allow.

The OECD noted that the Monetary Policy Council cut rates in March to 3.75%, but should remain on hold for the remainder of the year. Gradual easing might restart in Q2 2027, it noted.

The OECD observed that the general government deficit had widened to 7.3% of GDP in 2025 and forecast that the deficit would remain wide at 6.9% of GDP. That is just above the government's official 6.8% forecast. The OECD forecast that the deficit would be lowered to 6.3% of GDP in 2027. The government hasn't released its target for that year, but it can be safely assumed it will likely seek to lower the deficit by 0.5pp of GDP. The OECD noted that fiscal consolidation is needed, and that to finance higher defence spending and address ageing costs and the climate transition on a sustainable basis, a long-term plan for public finances is needed.

The OECD likewise urged authorities to focus on the greater upskilling of the workforce and increasing the statutory retirement age to help keep more people in the labour market. Education and retraining may well be done, but it can be assumed safely that there will be no increase in the retirement age, which has become politically poisonous in Poland.

Overall, the OECD is now the most pessimistic of the 10 leading forecasters, the average of whose forecasts see growth of 3.5% in 2026. The government sees a slightly higher 3.6%. The NBP saw 3.9% in the March projections, but these didn't take the Middle East conflict into account and it will be lowered, likely dropping the average to around 3.4%. Whether the OECD's pessimism will be warranted likely depends on how much the Middle East turmoil will impact growth this year. One saving grace for Poland is the sharp influx of EU funds of all stripes, but the end result will clearly depend on the endgame to the situation in the Middle East and perhaps other conflicts as well.

Click here for our comprehensive database of macro forecasts.

• EBRD says it sees no clear path for compliance with EDP before 2028

EBRD lowered Wed. its real GDP growth forecast for Poland to 3.5% for 2026 in a new report from the 3.7% given in February and trimmed its 2027 forecast to 2.8% from 3.0% before, according to a statement. The bank noted that growth momentum slowed in Q1 2026 despite strong credit demand and a pick-up in corporate investment lending as firms geared up for the implementation of projects co-financed by the EU. It said economic activity would be supported by peak absorption of Recovery and Resilience Facility (RRF) funds this year and by defence spending rising to 4.8% of GDP. Risks were said to be related to a possible escalation of the conflict in the Middle East and weaker euro-area demand.

The EBRD also noted that Poland continues to be subject to the EU's Excessive Deficit Procedure (EDP), but it said it saw no clear path to compliance before 2028. It noted that the general government deficit was forecast at 6.8% of GDP in 2026, down only slightly from 7.3% in 2025.

Overall, the EBRD's growth forecast is right in line with the average of the 10 leading forecasters for Poland, though it is relatively strong compared with those from the IMF (3.3%) or the World Bank (just 3.1%). The big influx of EU funds -- regular EU funds are peaking, RRF funds are flooding, and SAFE funds have come too -- will underpin economic activity, but the extent of growth will depend in part on how the situation in the Middle East is resolved and whether the external supply shock worsens and/or spreads to other parts of the economy.

Click here for our comprehensive database of macro forecasts.

• Exports drop by 9.3% y/y as consumption and investment goods slide
• Imports fall by 10.7% as domestic buyers purchase far fewer consumer goods
• Jan-May deficit still widens by 3.6% y/y, indicating ongoing pressure

The foreign trade deficit narrowed by 15.7% y/y to USD 5.6bn in May, according to preliminary data from the Trade Ministry. We note that the long Eid Al Adha holiday distorted the monthly figures, leaving the data less informative than usual as a clean signal of underlying trade momentum, which was also visible in the simultaneous decline in both exports and imports, we note.

In this regard, exports fell by 9.3% y/y to USD 22.5bn in May. The decline mainly stemmed from the consumption goods and investment goods exports, which dropped by 18.8% y/y and 18.7% y/y, respectively. We attribute the setback partly to spillovers from the Iran war and partly to softer external demand conditions, which continued to weigh on Turkey's export performance. Raw material exports also decreased by 4.2% y/y during the month. Regionally, the EU remained Turkey's leading export destination, followed by other European countries and the Middle East. Germany ranked as the largest country-level market, ahead of the US and Italy.

Imports also softened, falling by 10.7% y/y to USD 28.1bn in May. The decline was mainly on the back of consumption goods imports, which dropped by 30.1% y/y, while investment goods imports fell by 18.4% y/y. Raw material imports proved more resilient, decreasing by a more limited 3.9% y/y. By region of origin, the EU retained the largest share in Turkey's imports, followed by Asia and other European countries.

The broader picture still looks less benign than the May headline suggested, we note. In Jan-May, the foreign trade deficit widened by 3.6% y/y to USD 42.7bn, while the rolling 12-month deficit increased by 7.8% y/y to USD 93.6bn. We therefore think May's sharp narrowing was largely flattered by calendar effects and weaker trade volumes, rather than pointing to a durable easing in external financing pressures.

• Broader unemployment measure hits 20.5% as discouraged workers abandon searches
• Labour underutilisation reaches 30.1%, nearly one-third of workforce
• Participation drops as employment shrinks and demographics add new pressure

The unemployment rate for the 15+ age group fell by 0.5pps y/y to 8.0% in April on an unadjusted basis, Turkstat data revealed. The seasonally-adjusted measure shed an identical 0.5pps y/y, settling at 8.2%. The headline readings, however, obscured a deeper and more persistent problem, we note. Turkey's unemployment rate lingered in the 8-10% corridor for years, including periods when annual growth exceeded 10% and joblessness barely budged, pointing to structural unemployment of substantial depth that cyclical expansion did little to resolve, we note.

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In this regard, once we add the potential labour force, the broader unemployment measure rises to 20.5%. This category includes those seeking work but not immediately available to start, as well as those available to work but no longer actively searching, including discouraged workers who have stopped looking because they do not expect to find a job. In our view, this remains the key weakness behind Turkey's seemingly low unemployment rate, particularly given that headline unemployment has stayed broadly stuck in an 8-10% range even during periods of very strong growth in last decade.

The picture becomes even weaker once we further included time-related underemployment. The labour underutilisation rate stood at 30.1%, meaning that almost one-third of the labour-market-related population was either unemployed, available but discouraged from job search, or working part-time despite preferring full-time employment. We think this points to a structural employment problem that headline unemployment alone fails to capture.

The labour force participation rate declined by 0.8pps y/y to 52.3%. The working-age population rose by 0.9% y/y in April, while employment fell by 0.2% y/y, reflecting a sixth consecutive contraction. Labour supply also eased by 0.7% y/y. Taken together, these figures suggest that the labour market absorbed none of the demographic addition. The rate fell because fewer adults chose to participate rather than because more found work, and the divergence between those two readings of the same headline print mattered considerably, we assess.

Justice minister Akin Gurlek: 140 new courts are being established (Hurriyet)

CHP's new leader Kemal Kilicdaroglu will speak at group meeting (Hurriyet)

Parliament speaker Numan Kurtulmus: Turkey is important guarantee for future of Europe (Hurriyet)

263-year prison sentence are sought for imprisoned Bolu mayor Tanju Ozcan (Hurriyet)

Kemal Kilicdaroglu's spokesperson: CHP's vote share is not enough to defeat AKP (Sozcu)

Foreign investors make sales worth USD 664mn (Sozcu)

CBT reserves fall to USD 160.2bn (Sozcu)

Turkish economy suffers blow from war effort: OECD lowers growth forecast (Sozcu)

EBRD cuts its growth forecasts for Turkey (Sozcu)

Turkey to invest USD 6bn in renewable energy by 2035 (Sabah)

Turkey-France trade target is USD 30bn by 2030 (Sabah)

President Erdogan's message to CHP: Their agenda is power struggles, it does not concern us (Sabah)

• Next MPC meeting: Jun 10, 2026
• Current policy rate: 37.0%
• EmergingMarketWatch forecast: Hold
• Rationale: CBT may hold as softer May inflation and revised Inflation Report targets give room while reserves pressure and bond yields argue for tighter effective funding

We expect the CBT to keep the policy rate unchanged at 37.0% at the forthcoming MPC meeting, while continuing to fund the market through the upper corridor at 40.0%. Our latest inflation model set gives a signal of 1.4% m/m for May CPI, slightly below the Bloomberg median survey expectation of 1.6% m/m. If inflation materialises around these levels, annual CPI will remain broadly unchanged at around 32.3%, leaving the CBT with enough room, at least from a headline inflation perspective, to avoid a formal policy rate move at this meeting, we assess.

That said, the macro-financial backdrop looks less benign than it did a month ago, we note. Political risk increased after the absolute-nullity ruling against the opposition CHP, while market pressure again spilled into reserves. The Bank also tightened reserve requirement rules and lowered several credit growth caps across both consumer and corporate lending categories. The most striking adjustment targeted overdraft-style credit limits through credit deposit accounts. The choice of instrument was insightful as he CBT did not opt for another visible policy-rate hike but tightened through quantity restrictions and macroprudential channels, we note. Despite these measures, the CBT reportedly lost another USD 13bn in international reserves due to heavy FX intervention.

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In this regard, we think market closures during the Eid Al Adha holiday did not prevent sizeable intervention, which underlined the scale of pressure in the FX market. Furthermore, we note that the ongoing war in Iran continues to weigh on the economy through higher energy import costs, portfolio outflows and weaker tourism revenues. We think these pressures also explain why the two-year benchmark government bond yield has risen to 43.4%, which, in our view, would normally justify at least a 300bps increase in the policy rate and the effective funding corridor. Still, the CBT's usual playbook has been to respond to market pressure only with a delay, often at the last minute, and we do not expect a formal rate hike at this meeting. In this regard, we also remind that the Q2 inflation report gave the Bank additional room for manoeuvre, as it raised its 2026 interim inflation target to 24.0% from 16.0% and announced its end-2026 inflation forecast at 26.0%. This makes the CBT's target framework more flexible in the near term. That said, we still expect further upward revisions, most likely in the Q4 inflation report.

Overall, we think the cleaner policy response would be a 300bps hike in the policy rate to 40.0%, combined with a return to one-week repo funding after the suspension of repo auctions following the outbreak of the Iran war. In technical terms, this would not represent a major additional tightening, as the CBT is already funding the market at that rate. But it would make the framework clearer, reduce the gap between the official stance and the effective stance, and give the Bank a stronger communication anchor.

The trade-off has become increasingly uncomfortable. Higher rates remain politically sensitive, we underline. The CBT may also be late in delivering an outright hike, as from the Bank's perspective, another increase in borrowing costs could add to debt-servicing pressure on households and corporates whose incomes have not kept up with financing costs. Additional rate hikes could also attract more short-term speculative inflows rather than improving the quality of external financing, the Bank might think. Under these conditions, the CBT management may view keeping the current macroprudential tightening as the less politically explosive option rather than increasing the policy rate.

Summary of April rate-setting meeting

MPC rate decision in April

Quarterly Inflation Report for Q2

Monetary policy strategy for 2026

Automotive industry stagnates, production and exports of Argentine-made cars fell again (Infobae)

Reserves: the BCRA has already bought more than USD 10bn and met its full-year 2026 target (La Nación)

Record dollar inflows: Argentine companies raised more than USD 6.2bn in the market in the first four months of the year (La Nación)

The Milei government formally filed the request for Argentina to join the Trans-Pacific Partnership (Clarin)

Pirelli halts tire production for seven days and will stop working weekends starting in July (Clarin)

One by one, the CGT's complaints against the labor reform regulations and their impact on union power (Clarin)

• Law to encourage formalization of savings held outside of banks attracted little interest so far
• Caputo seeks to relax fiscal controls even more, addressing concerns brought up by accountants

Economy Minister Luis Caputo said the government will send Congress a revised version of the Fiscal Innocence Law in the coming days, looking to address the issues that prevented the initiative from having the expected impact, according to reporting by Infobae.

The fiscal innocence law aims to encourage the formalization of Argentines' massive savings held outside of the local financial system, some USD 250bn according to international investment position data, which could be a significant development for Argentina's shallow financial market. To do this, the law relaxed fiscal controls in a few ways: it introduced a simplified income tax regime that relies on self-reporting, it barred the tax office from reopening probes into past income or wealth reports, and it significantly raised the monetary benchmark for the transactions that the tax office will scrutinize, among others. Essentially, the idea was to enact rules to safeguard depositors from facing penalties or extra tax obligations on the money they were keeping outside the financial system.

the law's implementation earlier this year did not have the impact Economy Minister Luis Caputo expected, as reflected in the slow growth of USD deposits. Caputo said he held meetings with accounting companies to understand why the new law was not attracting new deposits, and the new bill will reflect the result of those meetings. The amendments would remove wealth and income limits to qualify for the simplified income tax regime, and preserve income self-reporting even in cases where there is a large discrepancy with tax office data.

Overall, the government is doing what it can on the regulatory side to incentivize the formalization of savings held outside of the local financial system, but change won't happen overnight. Argentina has a long negative track record that includes episodes of forced currency conversion of private deposits, ad hoc taxes on wealth, and long periods of financial repression that forced depositors into losses, all of which contributed to the high degree of distrust in the local financial system. The situation can improve gradually if policy remains favorable, but it also requires a more dynamic economy that can stoke investor sentiment.

• Werning says BCRA unwound stock of currency future and repaid currency swap drawdowns
• Werning says reserve accumulation likely to be more aligned with BCRA's USD purchases moving forward

BCRA Vice President Vladimir Werning said the BCRA reset some of its FX firepower by unwinding its stock of currency futures and repaying past drawdowns from currency swaps with the US Treasury and the People's Bank of China, according to a presentation at a finance event. Werning acknowledged that the combination of having to recover FX firepower, sell USD to the Treasury for FX debt payments, and pay the BCRA's own Bopreal bonds to deal with the high stock of private sector commercial debt was a factor limiting FX reserve accumulation in the first half of 2026, even though the central bank bought USD in the spot market at a faster rate than expected. Werning said reserve accumulation will be more closely aligned with the BCRA's USD purchases moving forward.

As for other topics, Werning again acknowledged that demand for money, measured by an aggregate the BCRA calls private transactional M2, has not been growing as expected to start the year. However, Werning noted that this did not affect the BCRA's reserve accumulation plans. Basically, the BCRA expected an increase in demand for pesos to lead the private sector to sell part of its USD savings, and the central bank would be the key player in buying USD and injecting ARS into the economy. Werning said the private sector has been selling those USD, but instead of spending their pesos, the private sector reinvested in liquid Treasury assets. Werning said the private sector still wants these pesos to feed an investment cycle, so it will eventually reduce its Treasury bill holdings and the genuine increase in demand for money will become visible, just with a longer lag than the BCRA initially projected.

Overall, we usually focus on net FX reserves measured under the IMF's Special Data Dissemination Standard, which has been showing no improvement in net reserves since the start of the year, despite the BCRA's USD purchases exceeding expectations. While we believe this is a useful methodology as a conservative measure of net FX reserves in a stress scenario where rollover is not achievable, it does obscure improvement in the BCRA's FX liquidity and buffers. Part of the reason net reserves did not increase as gross reserves did was that liabilities due within a year increased, but the BCRA does have more liquidity and there is also the possibility that the repos could be extended.

• Surplus rises from USD 7.0bn the year before and tops USD 7.5bn consensus
• Exports to the US fall 14.0% y/y to USD 10.5bn

Brazil's trade surplus rose to USD 7.8bn in May from USD 7.0bn a year earlier, coming in above the consensus expectation for a USD 7.5bn surplus, according to data released Wed. by the Development, Industry, Commerce, and Services Ministry (MDIC). On a monthly basis, the surplus fell 25.8% m/m from USD 10.5bn in April. In Jan-May, the trade surplus rose 34.2% y/y to USD 32.7bn.

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Exports grew 6.6% y/y to USD 31.9bn in May, marking the fourth consecutive increase. In the breakdown, only exports from extractive industries declined, driven by lower sales of iron ore and crude oil. In turn, exports of agricultural, manufactured, and other products increased from a year earlier. Imports rose 5.3% y/y to USD 24.1bn in May, marking the third consecutive increase. Higher imports of manufactured and other products more than offset declines in extractive and agricultural imports.

China remained Brazil's top trading partner in May, accounting for 32.9% of exports (up from 32.1% a year earlier) and 28.2% of imports (up from 24.0%). The EU remained the second-largest export destination, accounting for 15.4% of exports, followed by the US at 9.7%. On the import side, the EU accounted for 16.7% of total imports, followed by the US at 13.3%.

Exports to the US fell 14.0% y/y to USD 3.1bn, marking the tenth consecutive decline, as Brazil continues to face a 10% additional tariff. While exports to the US continued to weaken, shipments to China rose 9.5% y/y. Imports from the US fell 11.1% y/y to USD 3.2bn, resulting in a narrow bilateral trade deficit of USD 120mn.

Overall, Brazil's trade surplus continues to benefit from higher international oil prices and strong agricultural exports, particularly of soybeans and beef. Imports have also continued to rise, reflecting higher oil and fertilizer prices as Brazil still imports oil despite being a net exporter. The government forecasts a trade surplus of USD 70bn-90bn this year, although the outlook faces both upside risks, such as sustained high oil prices due to the Middle East conflict, and downside risks, including higher US tariffs and weaker global demand amid geopolitical tensions.

• Lula says he will reach out to Trump to discuss the new tariff threats
• Lula reinforces sovereignty narrative and attacks Flávio Bolsonaro, as expected

President Lula da Silva said Wed. that Brazil cannot accept the treatment it has received from the US, referring to the tariff threats stemming from the Section 301 investigation, according to remarks made during a ministerial meeting in Brasília. Lula criticized US Secretary of State Marco Rubio and said there are people betraying Brazil in pursuit of personal interests in a reference to Senator and presidential pre-candidate Flávio Bolsonaro. Lula also said he intends to speak directly with President Donald Trump about the tariffs and reiterated that Brazil will seek alternative markets should the measures be implemented.

Meanwhile, Foreign Minister Mauro Vieira and US Trade Representative Jamieson Greer met Wed. in Paris, where the USTR signaled openness to advancing negotiations. Brazil and the US established a bilateral task force to discuss the Section 301 investigation after Lula and Trump met in Washington in early May, which is still ongoing.

Overall, following the USTR's recommendation to impose an additional 25% tariff on Brazilian exports under the Section 301 investigation, Lula has intensified his sovereignty narrative and his criticism of Flávio Bolsonaro, as expected. A similar strategy proved effective in 2025, when Trump imposed an additional 50% tariff on Brazilian products amid political influence by members of the Bolsonaro family. This time, the proposed tariffs were announced only days after Flávio Bolsonaro's meeting with Trump, creating an additional political burden for his campaign despite his efforts to distance himself from the measure.

In our view, the tariff threat carries a political component, making it uncertain whether ongoing technical negotiations will be sufficient to prevent the implementation of the additional 25% tariff. If combined with the separate 12.5% tariff proposed under the US investigation into imports of goods allegedly produced with forced labor, total additional tariffs on some Brazilian products could reach 37.5%. While these measures could affect specific sectors, particularly manufacturing, Brazil's diversified trade network should help mitigate their broader economic impact, as observed during the 2025 tariff episode.

• External risks overtake default and economic activity risks as the second-largest threat
• Financial institutions see leverage stabilizing at elevated levels, which could further increase default rates

Financial institutions surveyed by the BCB continued to view fiscal risks as the most significant threat to Brazil's financial stability, according to the Q2 2026 Financial Stability Report published Wed. by the BCB. Risks stemming from the external environment ranked second, driven by the ongoing Middle East conflict, overtaking concerns related to credit defaults and economic activity. Regarding the financial and economic cycle, institutions reported a trend toward stability at elevated levels of household and corporate leverage, which could further increase default rates. Confidence in the financial system remained high, although it slipped marginally from the previous survey, the BCB added.

Overall, the impact of the Middle East conflict on Brazil's inflation outlook has become a more prominent concern for financial institutions, although fiscal risks remain the main threat to financial stability. Survey respondents increased both the perceived likelihood and potential impact of fiscal risks compared with the Q1 report. While we continue to expect the government to achieve its primary surplus target of 0.25% of GDP (BRL 34.0bn) this year within the lower limit of the tolerance band (-0.25% of GDP), and only due to authorized exceptions, concerns remain elevated due to the rapid growth of mandatory expenditure and the lack of political appetite to address the issue ahead of the October elections. Recent fuel subsidies introduced to mitigate the effects of the energy shock are likely to have further reinforced these concerns. In this context, a fiscal reform focused on expenditure is likely to become unavoidable in 2027, although its design will depend on the outcome of the presidential election.

• Galípolo says Brazil is weathering economic shocks better than its peers
• Galípolo says productivity remains a challenge for the Brazilian economy

BCB Governor Gabriel Galípolo said Wed. that the BCB sees a demand-side component behind recent inflationary pressure, citing household income growth, credit-driven consumption stimulus, economic resilience, and low unemployment, according to remarks made at the Lisbon Forum. Galípolo added that Brazil has been weathering economic shocks better than many of its peers, although he noted that low productivity remains a structural challenge as it tends to put upward pressure on prices.

Overall, the Copom indicated in the minutes of its latest Apr 28-29 monetary policy meeting that the current environment reflects both demand-side inflationary pressure given the still-positive output gap and supply-side pressures stemming from the energy shock. In our view, Galípolo's remarks are consistent with the Copom's growing concerns about inflationary pressures. Still, we do not believe this will lead the committee to pause the easing cycle in June, and we continue to expect a 25-bp cut at the Jun 16-17 policy meeting given indications from Copom members that the tight monetary policy has been effective. Galípolo himself said the output gap was narrowing due to the restrictive monetary environment. However, the increasingly hawkish tone regarding demand-side inflation, partly driven by government measures supporting household consumption ahead of the elections, is likely to weigh on future decisions and could contribute to a pause in the easing cycle after June.

• OECD says GDP growth in 2026 will be supported by exports and resilient private consumption, while high interest rates weigh on investment
• OECD sees inflation easing gradually while monetary policy remains restrictive
• OECD calls for continued fiscal efforts to ensure public debt sustainability

The OECD edged up its GDP growth forecast for Brazil to 1.6% for 2026 from the 1.5% given in March, according to its Economic Outlook published Wed. The organization expects growth to slow from 2.3% in 2025 but remain supported by exports and driven by mining and agricultural production as well as Chinese demand, the implementation of the EU-Mercosur agreement, and lower US tariffs. The OECD also said it expects private consumption to remain resilient, supported by a robust labor market and rising disposable income. In contrast, a restrictive monetary policy and elevated global uncertainty are expected to weigh on investment. For 2027, the OECD forecasts GDP growth to accelerate to 2.1% as lower inflation allows for further monetary easing, supporting domestic demand.

The OECD said it expects inflation to ease gradually over the forecast horizon. It raised its inflation forecast for 2026 to 4.4% from 4.1% due to higher energy prices, but lowered its 2027 forecast to 3.6% from 3.8%. The organization said lower energy prices in 2027 should allow the Copom to continue easing monetary policy, although the Selic rate is expected to remain in restrictive territory through the end of that year. The OECD forecast the Selic at 13.25% at end-2026, implying an additional 125bps of easing from the current 14.50%, and at 10.75% by end-2027. However, it noted that uncertainties regarding the duration and intensity of the Middle East conflict could affect future monetary policy decisions. Holding a tight monetary stance remains essential to re-anchor inflation expectations, the OECD added.

On fiscal policy, the OECD said fuel subsidies and lower excise taxes are expected to widen the fiscal deficit. It reiterated that long-term debt sustainability will depend on continued fiscal consolidation, more efficient public spending, and stronger tax administration and revenue collection. The organization also recommended containing mandatory expenditure growth by reviewing indexation mechanisms, reassessing the targeting and efficiency of social programs, and reducing tax expenditures.

The OECD said the outlook sees downside risks as higher energy and fertilizer prices could weigh on inflation and GDP growth, exports could face disruptions from global supply-chain challenges, and fuel subsidies could be extended beyond their current horizon, increasing fiscal risks. On the upside, a stronger agricultural harvest and faster-than-expected disinflation could support growth.

Finally, the OECD noted Brazil's renewable energy mix as a strength and suggested lowering regulatory barriers in network sectors and professional services to foster competition and improve productivity, complementing the gains expected from the tax reform. In addition, it encouraged greater investments in education to enhance human capital and suggested reducing the labor tax wedge for low-income workers to reduce labor informality.

Overall, the OECD's upward revision to its 2026 growth forecast follows a strong performance in Q1, supported by a strong labor market, real wage gains, and government transfer programs. At the same time, elevated external uncertainty and inflationary pressures stemming from the Middle East conflict continue to complicate the monetary policy outlook. While we still expect another 25-bp Selic cut by the Copom in June, inflationary pressures increase the likelihood of a pause in the ongoing "calibration" cycle afterward. Fiscal risks associated with fuel subsidies may also become increasingly relevant for policymakers, particularly as inflation expectations remain de-anchored over longer horizons and political uncertainty rises ahead of the October elections.

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• Output slows from revised 4.4% y/y increase in Mar, and tops 1.9% consensus
• Output growth rises 0.7% m/m in Apr, up from revised 0.3% rise the month before

Industrial output rose 2.7% y/y in April, slowing from a revised 4.4% increase in March but coming in above the consensus expectation for a 1.9% increase, according to data released Wed. by the stats office IBGE. In the breakdown, mining continued to drive growth (+10.6% y/y), while manufacturing expanded for the second consecutive month (+1.2%). On a monthly basis, industrial output rose 0.7% m/m in April, accelerating from a revised 0.3% increase in March and exceeding the consensus forecast of 0.5%. In Jan-Apr, industrial production grew 1.7% y/y.

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Eight of the 25 industrial segments monitored by the IBGE expanded y/y in April. The largest positive contributions came from coke, petroleum products, and biofuels (+13.3% y/y), extractive industries (+10.6%), and food products (+3.2%). The Middle East conflict contributed to stronger growth in the first two segments, while higher production of sugar, beef, poultry, and pork supported food output. Rubber and plastic products and motor vehicles also contributed positively to overall growth. On the downside, chemicals (-4.5% y/y) and machinery and equipment (-7.0%) exerted the largest negative pressure. The decline in chemicals reflected weaker production of fertilizers and other pesticides, while the drop in machinery and equipment was driven by lower output of air conditioners and harvesting machinery. Metallurgy, apparel, other transport equipment, timber and cellulose, and leather products also posted yearly declines.

By economic category, three of the five groups recorded yearly increases in April. Intermediate goods rose 3.8% y/y, marking the fourth consecutive increase, while consumer goods expanded 2.1% and non-durable consumer goods grew 1.0%. In turn, capital goods fell 4.3% y/y, returning to contraction after a temporary increase in March, while durable consumer goods declined 3.4% following growth in the previous month.

On a monthly basis, industrial production increased 0.7% m/m in April, up from 0.3% in March to come in above the 0.5% consensus expectation. This marked the fourth consecutive monthly gain. According to the IBGE, extractive industries and the coke, petroleum products, and biofuels segment were the main drivers of the monthly increase, supported by external market conditions. In contrast, chemicals, pharmaceuticals, machinery and equipment, metallurgy, and motor vehicles weighed on the monthly result.

Overall, industrial production continues to benefit from the strong performance in the extractive sector amid the ongoing energy shock, particularly through oil and biofuel-related activities. Industrial GDP growth surprised to the upside in Q1 (+1.6% y/y), largely driven by oil and gas extraction. The government expects industrial activity to moderate over the next two quarters before recovering in Q4 as the effects of the ongoing monetary easing gradually materialize in manufacturing. While industrial output has shown resilience, the sector continues to face downside risks from a monetary environment that is likely to remain more restrictive than previously expected due to the energy shock, as well as from growing tariff threats from the US, the main export destination for Brazilian manufactured goods. On the other hand, a robust labor market and continued real wage gains should provide some support to domestic demand and industrial activity.

• PMI remains slightly above the neutral mark, supported by new clients, while competition, financial constraints, and weak demand weigh on activity
• Input cost inflation reaches its fastest pace in 15 months, pressured by the Middle East conflict

The S&P Global Brazil Services PMI Business Activity Index fell 1.9pts m/m to 50.4pts in May from 52.3pts in April, according to data released Wed. by S&P Global. The decline extends a six-month period of mixed performance, although the index has remained above the 50-pt neutral mark for seven consecutive months, indicating continued expansion in the sector. S&P said new orders were broadly stagnant in May, as gains from new clients were offset by intense competition, financial constraints, and subdued demand. In this scenario, employment continued to increase but at its slowest pace in four months. Business confidence also weakened from the month before, remaining below its long-term average.

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Input costs continued to rise in May and increased at their fastest pace in 15 months, reflecting the effects of the Middle East conflict on energy prices. Companies also reported higher costs for construction materials, chemicals, electronic components, food products, metals, and packaging. Companies said they continued to pass part of these higher costs on to consumers.

Overall, the Services PMI has shown mixed signals over the past semester, although it remains above the 50-pt neutral mark and continues to point to modest expansion in activity. As monetary policy is expected to remain restrictive even after the conclusion of the ongoing Selic "calibration" cycle, the sector is likely to continue facing headwinds from high borrowing costs and tighter financial conditions. On the other hand, a resilient labor market and continued real wage gains should provide support for domestic demand. In addition, activity in June is likely to receive a temporary boost from the World Cup, which is expected to support consumption and services activity ahead of the October elections.

• US says Brazil has failed to effectively implement and enforce import prohibitions on goods produced with forced labor despite trade agreements and international commitments
• Brazil likely to submit comments on the findings by Jul 6 while a public hearing is scheduled for Jul 7
• Measure adds to growing US trade pressure on Brazil, although its broader scope reduces the relative impact on Brazilian competitiveness

The Office of the United States Trade Representative (USTR) proposed the implementation of an additional 12.5% tariff on Brazilian products, citing alleged shortcomings in Brazil's efforts to combat trade involving goods produced with forced labor, according to a statement released late Tues. The USTR argued that Brazil has failed to effectively implement and enforce import prohibitions on products made with forced labor despite its extensive network of trade agreements and its ratification of International Labour Organization (ILO) conventions addressing forced labor. These commitments had been highlighted by the Brazilian delegation during the investigation.

Interested parties may submit comments on the preliminary findings to the USTR until Jul. 6, while a public hearing on the matter is scheduled for Jul. 7.

Overall, this is yet another US threat to increase tariffs on Brazilian exports. However, unlike the tariffs proposed under Section 301, this measure has a broader scope, affecting multiple countries and therefore mitigating its relative negative impact on Brazil's exports. Tariffs from both investigations would be cumulative (25.0% from Section 301 and 12.5% from the forced labor investigation) and Brazilian goods could face a 37.5% additional import tariff. From an economic standpoint, Brazil remains relatively resilient to US tariffs, supported by its diversified trade partnerships, though the manufacturing industry is the most vulnerable to the threats. Politically, the measure provides additional support for President Lula da Silva's sovereignty narrative against the US, which boosted his approval ratings in 2025 and could do so again this year ahead of elections in October. As Lula continues to link the tariff threats to his opponent, Flávio Bolsonaro, the issue has the potential to provide support for his reelection bid.

• MPC meeting: Jun 16-17, 2026
• Current policy rate: 14.50%
• EmergingMarketWatch forecast: 25-bp cut (to 14.25%)

Brazil's real GDP grew 1.8% y/y and 1.1% q/q in Q1 2026, coming in broadly in line with consensus expectations and, though up from Q4, it marked a slowdown from higher levels before, supporting the BCB's assessment that monetary tightening has been effective in cooling demand. The quarterly acceleration was broadly anticipated and reflected a resilient labor market, real wage gains, government transfer programs, and measures aimed at supporting demand, including income tax cuts. Looking ahead, the BCB expects economic growth to moderate in the coming quarters as monetary policy remains restrictive despite the ongoing "calibration" cycle and as agricultural growth decelerates. Because the GDP data did not surprise to the upside, we believe it is unlikely to prevent the Copom from cutting the Selic by 25bps at its next policy sitting on Jun 16-17, bringing the rate to 14.25% in a third consecutive reduction. At the same time, resilient economic activity highlights the importance of fiscal policy in sustaining demand, which could limit the overall magnitude of the easing cycle alongside elevated external uncertainty.

The labor market has begun to show signs of the impact of tighter monetary conditions. Formal job creation in April posted the weakest result for the month since 2020 and came in well below consensus. Th unemployment rate stood at 5.8% in the rolling quarter ended in April, which was well above the record low of 5.1% recorded in the quarter that ended in December 2025. Credit growth has also continued to moderate, reinforcing the Copom's perception of effective monetary tightening and creating room for additional Selic cuts. The IMF recently agreed that the Selic cuts implemented in March and April were appropriate and emphasized the need for flexibility in future decisions amid elevated uncertainty.

Despite evidence that monetary tightening is working, inflationary pressures have increased, prompting a more hawkish tone from some Copom members. BCB Monetary Policy Director Nilton David recently stated that monetary policy will remain restrictive for a prolonged period, even after the conclusion of the current easing cycle. He highlighted too persistent concerns regarding de-anchored inflation expectations, particularly for 2028, and reiterated that the Copom will do "whatever it takes" to ensure inflation returns to target. As domestic prices continue to face both direct and second-round effects from the ongoing energy shock, we expect the Copom to strengthen its communication on inflation control in an effort to prevent these effects from spilling over into longer-term inflation expectations. Still, we do not believe this will be sufficient to justify a pause in the easing cycle at the June meeting.

Overall, recent economic indicators continue to support the BCB's perception of an effective monetary policy, which brought the benchmark rate to 15.00% in late 2025, its highest level since 2006. This hawkish stance has allowed the Copom to start cutting the Selic rate despite the ongoing energy shock, which has been pressuring up domestic prices and inflation expectations. Additional inflationary pressures stemming from the Middle East conflict, and more recently from the potential effects of the El Niño phenomenon, have already reduced the expected magnitude of rate cuts, which before the conflict were anticipated to begin with 50-bp reductions. Even in this more challenging environment, we continue to expect the Copom to cut the Selic by 25bps in June while reinforcing its commitment to bringing inflation back to target and maintaining a data-dependent approach without providing forward guidance. In our view, the continued deterioration in longer-term inflation expectations, likely reflecting Brazil's indexation mechanisms and persistent fiscal concerns, is increasing pressure on the Copom to pause the calibration cycle after June, though more data will be needed to ascertain this likelihood.

• Report claims Governor Durazo is investigated for links with organized crime, Governor Villarreal for fuel smuggling
• LA Times claims both governors have been stripped from their visas, the governors deny this
• Report insinuates Governor Durazo travels to the US by cooperating with law enforcement, something we see farfetched
• We doubt the report, but a recent indictment of 10 current and former Sinaloa officials give it some credibility

The United States is currently investigating two sitting governors for links with organized crime, the LA Times reported on Wednesday, citing unnamed sources. Both governors denied any wrongdoing. President Claudia Sheinbaum questioned the motives behind the report and the alleged investigations.

The reporting claims Sonora Governor Alfonso Durazo is under investigation for links with organized crime, without further detail. The accusation goes beyond the relevant role held by Durazo, having served as president of the National Regeneration Movement party (MORENA) and, more importantly for the accusation, having served as Security Minister under ex-President Andrés López in 2018-2020.

The report claims Tamaulipas Governor Américo Villarreal is accused of fuel smuggling. Although he is certainly facing these accusations in local media, this doesn't seem right to us, considering the smuggling he is accused of might not constitute a crime in the US.

The daily claims both governors have been stripped of their visas because of ongoing investigations. This is consistent with other reports on Mexican officials, as the Donald Trump administration has indeed stripped a number of officials, although of a lower profile than these governors.

The report adds that both governors continue to visit the US without a visa. The daily says Governor Durazo is visiting the US for medical treatment, insinuating this is due to a mechanism of law enforcement cooperation. This is indeed farfetched, as we would not expect either of these officials to cooperate with the US in case of any indictment. The daily says Governor Villarreal is escorted by US officials when he travels to the US.

Overall, we have doubts about the credibility of this report. However, it's certainly relevant in the context of the late-April indictment of several top Sinaloa officials, including Governor Rubén Rocha. Even if the report is incorrect, we note it's consistent with a common sentiment that some top MORENA officials might have links with organized crime, including Governor Villarreal. On the other hand, the report is also well aligned with the view that the US is trying to meddle with local politics, perhaps trying to influence the 2027 midterms. All in all, the state of current accusations is unlikely to have a significant impact in the midterms, in our view; however, the risk that the US might indict more MORENA leaders or that it may present hard evidence against those already indicted but not captured by the Claudia Sheinbaum administration does present the greatest risk for the popular MORENA regime ahead of the midterms, in our view.

Sheinbaum asks Durazo and Villarreal clarify the alleged investigations against them (Animal Político)

The crimes for which Alfonso Durazo and Américo Villarreal are allegedly investigated for (El Financiero)

Alfonso Durazo Montaño assures his visa remains active following LA Times accusations (EL Sol de México)

Tamaulipas Governor Américo Villarreal denies there are any accusations against him (Animal Político)

US National Security Minister highlights Mexico's cooperation at Congress (El Economista)

US Security Minister says Sheinbaum has cooperated more than ex-Pres López, warns 9 cartels control the border (El Universal)

Sheinbaum warns that US accusations vs Mexican politicians puts in peril who decides in Mexico (La Jornada)

CNTE breaks in at the Education Ministry's office, vandalizes the building (Reforma)

Sheinbaum rejects a potential meeting with the CNTE, accuses of provocations ahead of the World Cup (La Razón)

State Ministry offers the CNTE a working route, sees conditions to reach agreements (Milenio)

Retailers call to regulate protests and blockades in Mexico (El Economista)

PEMEX faces a report of a spill near the touristic dock of Manzanillo (Expansión)

• USTR claims Mexico has failed to effectively enforce the prohibition of importation of goods produced with forced labor
• Economy Ministry says it trusts this measure will be modified following the ongoing revision of the USMCA

The US Trade Representative proposed on Tuesday to impose a 10% tariff on Mexican goods, following an investigation into the participation of forced labor in imported goods. The Mexican administration highlighted this is only a proposal. Indeed, the USTR proposes this tariff on Mexican goods because of its failure "to effectively enforce a prohibition on the importation of goods produced with forced labor".

The Economy Ministry (SE) said on Tuesday it's in talks with US authorities and said it trusts the measure will be modified following the ongoing revision of the US-Mexico-Canada Agreement (USMCA).

Overall, the measure, if ratified, would impose 10% tariffs on Mexican goods, while imposing a 12.5% tariff on goods from 54 countries, including China. This might actually increase the competitiveness of Mexican goods, specially if, as we would expect, USMCA-complying goods could be exempt. However, as with many protectionist policies threatened by the US, there is much uncertainty about whether this new tariff will be imposed and on what terms.

• We understand trade deal will be extended until 2042 if USMCA talks conclude positively

Both Mexico and Canada have formally expressed their interest in extending the US-Mexico-Canada Agreement (USMCA) 16 years, local media reported on Tuesday. Our understanding is that the trade deal will be automatically extended until 2042 if the ongoing revision concludes favorably.

Overall, Economy Minister Marcelo Ebrard confirmed Mexico proposed this extension to both Canada and the US. The extension will be most welcomed, in our view, giving investors and business-leaders much needed certainty.

The trade deal is currently set to expire in 2036.

• Says domestic demand moderated, but will be economy's main motor moving forward
• Anticipates gradual private investment recovery, despite lingering uncertainty
• Notes inflation continues to show upward pressure, beyond transitory pressure
• Calls to broaden fiscal revenues, target fuel subsidies

The Organization for Economic Cooperation and Development cut its 2026 GDP growth forecast by 0.5pps, to 0.8%, in line with the negative revisions made by other onlookers and local analysts after disappointing Q1 performance. Indeed, the OECD's new projection is the lowest among onlookers, half of the 1.6% growth projection made by the International Monetary Fund in April. This shows, unsurprisingly, to a likely negative revision by other onlookers moving forward, in line with poor economic performance so far in 2026.

The weak performance is in part due to a moderation of domestic demand and a deterioration of private investment, the organization added. Moving forward, the OECD sees domestic demand remaining as the economy's motor, favored by low unemployment. The OECD projects gradual investment recovery, backed by lower interest rates and hindered by global uncertainty. Fiscal consolidation is set to limit public consumption and public investment's contribution to growth.

OECD is not optimistic about international trade, in our view, seeing exports will be hindered by tariffs, slower US growth and war-related global uncertainty. Indeed, the organization notes auto exports remain weak. On this, we note the latest data is rather promising, with manufacturing exports up by 34.0% y/y in April, including a rebound of auto exports, up 8.2% y/y. It remains to be seen how much of this strong showing is transitory; however, we note non-auto exports add 11 consecutive two-digit improvements by April despite lingering uncertainty and currency strength, suggesting the scene might not be as adverse as the OECD and other experts warn.

The organization notes CPI inflation continues to show upward pressure, despite disappointing economic growth. The OECD recognizes this has been particularly driven by fruit and vegetable prices, which we note tend to show transitory volatility. Still, the OECD is right to note core inflation is showing upward pressure too, particularly from service prices. Moreover, the organization warns mid-term expectations remains solidly above the CB's 3.00% target. On monetary policy, the OECD says the CB should hold its policy rate as is until there is clear evidence that inflation is moving to converge to Banxico's target.

OECD recommends several fiscal adjustments, including making fuel subsidies more targeted and raising public revenues. The organization notes the tax subsidy is importantly financed from higher revenues from higher oil prices. In any case, the OECD predicts the budget deficit will narrow in 2026, to 3.6% of GDP, and in 2027, hitting 3.2% of GDP. However, despite the optimism of predicting this fiscal consolidation, the OECD highlights the need to strengthen public revenues, warning current consolidation is mostly achieved by cutting public spending.

Overall, the economy continues to disappoint by mid- 2026, in our view, with poor performance since 2024, once the pandemic-driven low-base effect faded, in our view. Indeed, growth is expected to average less than 1.0% in 2024-2026, without a clear expectation of robust recovery looking at the next few years, in our view. Indeed, it's unclear if growth will exceed 2.0% anytime soon, despite the low comparison base. Weak investment weighs on the long-term outlook further, in our view. Still, we see no conditions for a strong investment recovery, considering domestic and external uncertainty, unsound domestic policies, deinstitutionalization, and questions on the credibility of the division of powers, are to weigh on private investment moving forward, while the government's unwillingness to procure higher tax revenues that assure the financing of an ambitious welfare agenda and growing pension costs limits the capacity to strengthen public investment too.

Click here for our comprehensive database of macro forecasts.

• Sales maintain healthy dynamism, grow 4.8% y/y in Jan-May

Domestic auto sales grew by 5.0% y/y in May, according to data published by the stats office INEGI on Wednesday. This maintains healthy performance in the Mar-May moving quarter, and confirm the April 8.6% y/y improvement wasn't a fluke. Indeed, domestic auto sales grew by 4.8% y/y in Jan-May, to 627 thousand units.

Overall, domestic auto sales surprise us, considering their resilience amid weak economic growth and a disappointing pace by private demand to start the year. Whether this resilience can continue remains to be seen. However, it shouldn't be too surprising if it does, considering private demand fundamentals remain relatively strong, despite the weak pace of private demand seen in Q1.

• Next MPC meeting: June 25
• Current policy rate: 6.50%
• EmergingMarketWatch forecast: Hold

The Monetary Policy Council (MPC) was as clear as possible in last week's quarterly report presentation, saying the easing cycle has ended with the monetary policy firmly on neutral territory. The insistence that the easing cycle has ended is no surprise, matching the board's stance made in the last sitting, held in May. However, the clarity showing the ex-ante policy rate 2.8%, with the neutral band ranging from 1.8 to 3.6%, does diverge from the dovish stance of Deputy Governor Omar Mejía, who has insisted the monetary policy remains restrictive.

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Governor Victoria Rodríguez tried to minimize the divergence with Deputy Governor Mejía, recognizing the neutral band is not observed but estimated, recognizing a degree of uncertainty about its position. Still, it's clear that the CB's technical team and the bulk of the MPC do not agree with Mejía's dovish claim.

With this clear stance, it's evident the CB does not expect to alter its Monetary Policy Rate (MPR) in the coming months. This should at least cover the next three sittings, in our view, scheduled for June, August and September. The market anticipates this stability will extend further, with 90% of the analysts polled by the CB expecting the policy rate to stand as is until Q1 2027. This consensus wanes thereafter but remains relatively strong, with 77% of analysts anticipating stability by Q4 2027, according to Banxico's latest poll among analysts.

We believe stability throughout 2026 and 2027 might be warranted, given lingering inflationary pressures. However, the dovish position assumed by the bulk of the board through this easing cycle makes us question if the CB will not be looking to trim its policy rate earlier than expected. We believe the chances of the CB moving to raise its policy rate are slim, despite lingering inflationary pressures and loosely anchored mid-term expectations.

However, the CB's poll shows there is sharp division between analysts on what the next monetary policy move will be and when it will come. 14% of analysts anticipate a hike by Q2 2028 (the end of the horizon presented in the poll), while 28% expect a cut, and 59% anticipate stability.

To be clear, the board is not clearly saying how long the policy rate will stand at 6.50%. Thus, while it might make sense to anticipate stability through the rest of 2026, we believe the market should not be too certain about this and, more so, should not anticipate stability through 2027. Indeed, the MPC dodged a question precisely asking about this timeframe in the latest quarterly report presentation, in our view.

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

Egypt condemns Iranian attacks on Bahrain (Ahram)

Egypt seeks closer industrial cooperation with Ireland in pharmaceuticals, technology sectors (Ahram)

Egypt's trade deficit widens 48.8% y/y to USD 4.6bn in March amid rising imports (Zawya)

Egypt records eight M&A deals worth USD 22mn in Q1 2026 (Zawya)

Egyptian Tax Authority says natural gas tax amendments not to affect household bills (Zawya)

Egypt to Repay USD 1.8bn to IMF in H2, Eyes USD 3.3bn in New Disbursements (Sada Elbalad)

IMF Credits Egypt's Central Bank Reforms with Strengthening Monetary Policy Independence (Sada Elbalad)

Egypt, China extend currency swap deal for three more years (Egypt Today)

Egypt's trade deficit widens 48.8% in March 2026 (Egypt Today)

Egypt growth outlook stable but moderates slightly as inflation and energy pressures persist: EBRD (Egypt Today)

Egypt's government fast-tracks EGP 42bn pension payout for 10.2mn citizens via new digital system (Daily News Egypt)

Egypt records eight M&A deals worth USD 22mn in Q1 2026: Ansarada (Daily News Egypt)

• Exports fell 2.5% y/y driven by fertilizers, potatoes, and crude oil exports
• Israel halted gas supplies to Egypt in March, which dragged on industry and LNG exports from Egypt
• Imports jumped 17.8% y/y, driven by gas, petroleum products, crude oil, and wheat
• Trade deficit soars 54% y/y in Q1 as imports jump, export revenues plummet
• Egypt highly dependable on gas imports, war in Iran is a major external shock
• LNG imports jumped 81% to USD 8.9bn in 2025 as gas production weakened and demand for electricity rose

The foreign trade deficit soared by 48.8% y/y to USD 4.6bn in March following an even sharper increase of 87.6% y/y in February, according to data published by CAPMAS. The increase was due to a 2.5% y/y drop in export revenues and a strong 17.8% y/y jump in imports. The increase in imports was broad based, and both oil and non-oil imports rose sharply on the year, though for different reasons. While imports are generally supported by growing domestic consumption and investments, the oil imports jumped as a result of the War in Iran and the spike in gas prices. Egypt has become heavily reliant on gas imports to meet its energy needs. However, Israel halted gas exports to Egypt via pipelines, so the Arab country had to switch to more expensive LNG imports. On a positive note, Israel restored gas supplies in early April, while Egypt recently secured Libyan crude oil shipments - this crude is very similar to the one produced in Egypt, so the refineries should have no problems adding it to their crude intakes.

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The trade deficit soared 54% y/y in Q1 as exports fell by sharp 8% entirely due to non-oil exports such as fertilizers and plastics. Meanwhile, oil imports rose by sharp 18% y/y in the period, as both oil and non-oil imports surged. Interestingly, the import value of crude non-monetary gold soared in the period, reflecting higher prices and higher imported volumes, as Egyptians traditionally step up purchases of gold as hedge against inflation and uncertianty.

We remind that Egypt recorded a USD 52bn trade deficit in 2025, which accounts for about 14% of GDP. The trade deficit rose by 3.5% on the year as imports rose 8.8% y/y to USD 104bn driven by higher petroleum and non-petroleum imports. Crude oil imports doubled to USD 1.5bn in 2025, fuel imports held steady at USD 10.4bn, but LNG imports soared 81% y/y to USD 8.9bn. As noted, Egypt has become heavily reliant on gas imports to meet its energy needs - Egypt was expected to pay USD 12bn for gas imports in 2026, but that was before LNG prices soared. Meanwhile, wheat imports fell by 20% to USD 3.7bn in 2025. We attribute this decline to rising domestic produce on one hand, and the weak capacity of the military-owned agency that took over the grain import operation from GASC, on the other. Overall, imports have been rising steadily following a major currency reform that boosted private consumption, non-oil manufacturing, and investments. The country, however, remains heavily dependent on food and energy imports, which makes it vulnerable to a prolonged war in the Gulf. Egypt thus needs to continue with the structural reforms in order to make the economy more competitive and to face the more uncertain global trade environment.

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Overall, Egypt's trade goods account remains vulnerable to external shocks as the country relies heavily on imports for non-elastic goods such as food and fuels, while major infrastructure projects and growing urban population have fueled imports. The merchandise oil balance is set to remain in deficit for fourth year in a row in 2026, but at least it seems the country has avoided a crippling energy crisis, at least for now.

• Domestic credit expands robustly y/y driven by lending to private business sector, households and government
• Recent World Bank survey found only 3% of corporate investments are financed by bank loans
• Government accounts for 52% of all received loans
• CBE claims on central governments held steady m/m, but remain elevated

Private business sector credit expanded by a strong 23.2% y/y to EGP 3.59tn (USD 69bn) as of end-April (about 20% of GDP), edging up from a 22.8% y/y increase in March, according to monthly data release by the central bank (CBE). Most of the funds are channeled into the industry and services sectors, each accounting for about 25% of total loanable funds, but a more detailed breakdown is not available. Lending to the private corporate sector has remained robust over the past few years, despite economic uncertainty and high nominal and real interest rates. Economic activity has strengthened since 2024, and we think the private business credit supported private investments and the rebound in non-oil manufacturing, and led to a gradual recovery in domestic demand. Looking at m/m dynamics, credit growth was underpinned by a strong 3.0% m/m growth, easing from a 5.5% m/m increase in March, which was boosted by the 10% pound depreciation. Claims on private sector companies account for about 20% of total domestic credit as lending to the government continues to dominate the credit market. Growth in lending to households has also remained strong, expanding by 22.3% y/y in the month (previously: 22.8% y/y) and accounts for about 9% of total credit in the economy.

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Overall, the expansion of credit to the private economy (business plus households) has remained strong and is likely to strengthen further as uncertainty caused by the Middle East conflict subsides, consumer inflation moderates, non-oil manufacturing expands, and nominal interest rates are eventually slashed. However, the strong broad money growth that is above its historical average also contributes to existing inflationary pressures. Further, a recent World Bank survey found that many private companies actually rely on internal funds and other sources to finance their investments as bank loans account for only 3% of investment financing.

Lending to government

Net claims on the government, which account for 52% of total credit, fell by 1.2% m/m to EGP 9.34tn following a strong 4.2% m/m increase in the preceding month, and the annual growth rate eased to 11.5% from 16.2% previously. Meanwhile, CBE's net claims on the government remained steady for the fifth month in a row. Egypt had promised the IMF it would reduce direct lending to the government and to government agencies - a practice that undermined monetary policy and put pressures on the pound previously.

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Local banks have large exposure to high-yielding government securities, which has limited the decline in banks' asset quality over the past few years in which Egypt's underlying economic weaknesses have been tested by a series of external shocks. The share of NPL/total loans has remained broadly stable and low at around 3% before moderating to 2.1% as of end-June. The banking system's net foreign assets have improved significantly on the back of strong portfolio and remittance inflows.