• Inflation developments to be the main factor behind future monetary policy decisions
• Michl also suggested that governments should run a balanced budget in times of economic growth
• He tried to argue his opposition to rate hikes in mid-2021 to mid-2022 with an argument that the economy had not recovered from the pandemic yet
• Still, he has been claiming that the recent period of high inflation was due to interest rates remaining too low for too long (though he means the 2013-2017 period)
• Michl still opposes euro area membership, thinks independent monetary policy will be more useful
• Michl's remarks about stable interest rates likely mirror the current mood on the CNB board

CNB governor Ales Michl expects that interest rates will remain stable for some time, he told the public TV broadcaster. He would not elaborate, arguing that all options remained open at future MPC meetings. However, inflation would be instrumental in coming monetary policy decisions. In effect, it means that as long as inflation keeps picking up, there will be no chance to continue the current monetary policy cycle, in our opinion. We have been arguing that the bar for the next rate cut has been raised, and Michl all but confirmed our argument. As far as tariffs are concerned, Michl said that short-term fluctuations in goods' prices could not determine monetary policy, and it wasn't the CNB's task to handle them.

Michl reiterated that fiscal policy needed to remain strict, and that governments should be running a balanced budget in times of economic growth. This was an extension of his remarks from last weekend, regarding the announcement of FinMin Zbynek Stanjura that the state budget will target a deficit of about CZK 280bn in 2026, up from CZK 241bn in 2025. Michl has been hammering about fiscal policy for quite some time, though we cannot escape the feeling this is politically motivated. In all fairness, Michl was asked about his ties to opposition leader Andrej Babis, which he said did not influence monetary policy, especially with 6 more members on the CNB board. Still, we expect that if Babis returns as prime minister, Michl will become far less critical of fiscal policy.

It was good to see that the public TV broadcaster addressed the issue of Michl's voting history at MPC meetings, as he opposed all rate hikes that took place between the middle of 2021 and the middle of 2022. When he took over as CNB governor in July 2022, however, Michl maintained a hawkish position and insisted that interest rates should remain at that level. Michl explained his votes back then with the argument that the economy had not fully recovered from the Covid-19 pandemic yet, which is why it needed looser monetary conditions. Yet, Michl has also said, many times over, that the most recent period of high inflation was due to interest rates remaining too low for too long. Yet, this apparently doesn't refer to the 2020-2021 period, as one would expect, but rather the 2013-2017 period, when the CNB maintained the policy rate at practical zero (at 0.05%), and intervened in the fx market to keep the CZK weak. If Michl is to be believed, this is what led to high inflation almost a decade later, and the pandemic had little to no impact, which is an argument we find ... thin.

Michl also reiterated his opposition against the Czech Republic joining the euro area, an issue brought up after Bulgaria is expected to receive the final green light about adopting the euro as of the beginning of 2026. Michl argued that the Czech economy had not fully converged to that of the euro area yet, so leading independent monetary policy would be more beneficial. He also brought up the Swiss central bank as an example, though we suppose he quickly figured out it was not a good example, given that Switzerland is not part of the EU. In any case, the CNB will likely remain not very co-operative about any attempts to adopt the euro soon, though there is not much of a political will for that, either.

Back to Czech monetary policy, we believe Michl's remarks mirror the current mood on the CNB board, namely that they would rather keep interest rates stable until inflation eases. If we are to be thorough, one cannot rule out a rate hike at this point, especially if structural factors become stronger. If service prices show no sign of easing any time soon, the CNB board will likely consider a tightening of monetary conditions. This may be supported by a stronger-than-expected economic activity, and a recovery in manufacturing. It is still early, but the manufacturing PMI returned to a level over 50 for the first time in 3 years, and GDP growth has been decent, at 2.4% y/y in Q1 2025. A strong CZK will likely dampen external price pressure, but it appears insufficient for domestic inflation pressure. We doubt the MPC meeting in August will be the one to have a rate hike brought up. However, if nothing changes in the autumn, the September and November MPC meetings might be livelier than markets expect.

Decent first half: economy should rise by 2%, Putin and Trump restrict investment (Hospodarske Noviny)

Czech Republic asks for a change in ETS2 emission trading, 17 other member states join (Lidove Noviny)

US suspend deliveries of key arms to Ukraine (Pravo)

Return of Russian fuel [for nuclear power plants]? (Hospodarske Noviny)

The most powerful against the richest man, or what Elon Musk did not understand (Lidove Noviny)

Households face crisis times. Once accessible mortgage becomes a budget scarecrow (E15)

Heat wave culminates (Mlada Fronta Dnes)

Commander has modern camouflage, we only get rags, soldiers complain (Pravo)

Insolvencies increase only slowly, but situation is distorted by subsidies (E15)

Attention! Deadly mushrooms are already in forests (Mlada Fronta Dnes)

• Fiala believes the EU should focus more on growth than on climate targets
• The EU wants to reduce carbon emissions by 90% between 1990 and 2040, which environment minister Hladik finds unrealistic

The Czech Republic disagrees with the new EU climate targets, set at a summit on Wednesday (Jul 2), PM Petr Fiala said. The EU set a goal to reduce carbon emissions by 90% in 2040 when compared to 1990 levels. He argued there should be more emphasis on growth, as achieving these goals would inevitably harm the Czech manufacturing sector, in his opinion. Fiala furthered that while most EU member states are likely to be close to a 90% reduction in 2040, it will not be uniform across the Union, and some adjustments will need to be made. Environment minister Petr Hladik added that the Czech Republic could not possibly reach that target without a thorough transformation in industry, chemicals, cement production, power generation. While the Czech Republic supports a reduction in carbon emissions, the current target is considered unrealistic.

The approval of the new climate targets will eventually require a vote at the European Council, which will need unanimity. We suppose that the Czech Republic is by far not the only member state to oppose the new targets, so the odds are that it will take some time before these are adopted. However, as it usually happens, EU bureaucrats are very skilful in convincing member states not to block such decisions, which is why Fiala appears not very optimistic that Czech opposition will stand firm. After all, member states prefer not to use veto powers unless it is something really important, and it remains highly unclear how compliance with climate targets will be enforced, especially if slippage is widely spread.

• All the three leading parties gained 0.8-1pps in June
• STAN is back to third for the first time after the SPD formed a nationalist coalition
• 6 parties are projected to enter the next parliament

The three leading parties, namely ANO, Spolu, and STAN, all gained support in June, according to the latest opinion poll of Ipsos, carried out on Jun 24-29. ANO remains in the lead, polling at 35.1% (up 1pp m/m), and 13.7pps ahead of Spolu, which remained second at 21.4% (up 0.8pps m/m). It appears that the bitcoin donation scandal has remained without a major impact on the polls, though it could have been countered by reopening the Stork Nest case against ANO leader Andrej Babis. Interestingly, STAN, the other government partner, reported a solid gain, reaching 10.8% in June (up 0.9pps m/m), which put it slightly ahead of the SPD, which was fourth at 10.5%. Given that the gap between STAN and the SPD is very narrow, they are technically tied. Still, it was the first time STAN has been leading the SPD after the nationalist party formed an alliance with three smaller parties.

The Pirates continued to gain, reaching 6.7% (up 0.7pps m/m). It remains unclear whether the pollster includes the Greens in the Pirates' rating, given that the Greens polled at 2.7% in May, and now they are not in the questionnaire. The KSCM-led coalition follows behind with 5.7% (down 0.7pps m/m), while the Motorists remain just outside the 5% threshold, polling at 4.5% (down 0.1pps m/m). No other party has a chance of passing the 5% electoral threshold, so the odds are the next parliament will have 6 formations.

The pollster doesn't provide a seat projection, but it appears that ANO will lack the required number of seats to form a majority government alone. Given the distribution of parties, the SPD will be the easiest path for ANO to majority, and it is likely that the KSCM will not be sufficient. It is a bit early to draw conclusions, as the pollster said 44% of people that intend to go to the polls in October have not decided whom to vote for.

• We expect diverging pattern of retail and corporate lending to continue in short term
• Housing loans seem to have neared local peak
• Interest rates remain steady across forint corporate and retail loans

The stock of outstanding bank loans to the private sector rose by 6.5% y/y as of end-May, accelerating slightly compared to the 6.2% y/y growth in the previous month, the National Bank of Hungary (NBH) reported. The loan growth was the strongest since the beginning of the year, but we nevertheless qualify it as just an extension of the stagnating trend in lending activity, given that it has remained in the 6-7% y/y range for the past six months. The loan market was still characterised by diverging trends in the retail and corporate portfolios and we expect this dynamic to persist in the short term. Corporate lending activity has been constrained by weak demand on account of high uncertainty, while government stimuli for housing purchases and low indebtedness have stimulated retail borrowing, in our view.

Data Download

Data Download

Loans to households rose at an accelerating pace of 11.1% y/y as of end-May and their trend remained firmly on the upside. Consumer loans have been the main driver behind this sustained trend in the recent months, while housing loan growth appeared to have reached a plateau. A renewed stimuli for housing loan borrowing could come from the government's new, unlimited loan programme that PM Viktor Orban announced yesterday, we would expect. Households borrowed net HUF 139.3bn of new bank loans in the month, representing the highest monthly volume since mid-2021 if discarding a clear, high-value outlier in Aug 2022. In real terms, the growth of new bank loans nevertheless stagnated y/y at 6.6% y/y in May. Interest rates on retail loans persisted on a flat trend across all loan types during the month.

Nominal corporate loan growth picked up slightly to 2.6% y/y as of end-May, while the trend of new borrowing remained weak. Real, transaction-based corporate loans declined by 2.8% y/y in the month, but remained slightly better than the average y/y contraction since the beginning of the year. Non-financial companies borrowed net HUF 61.7bn of new bank loans in the month. The higher share of the new borrowing represented forex loans, in our opinion signalling that lending has remained concentrated on larger, mostly export-oriented companies. The government's subsidised loans schemes have not brought a turnaround on the forint loan market yet, we assess. Interest rates on forint corporate loans also remained on a stable level, while the interest rate on large, EUR-based loans continued to decline on the back of the ECB easing.

Data Download

Here is new data, Fidesz leads convincingly in popularity (Magyar Nemzet)

Hungarian families will be left with tens of thousands of forints more (Magyar Nemzet)

President Tamas Sulyok travels to Slovakia on official visit (Magyar Nemzet)

Electricity consumption also increases in summer, high import share poses risks (Magyar Nemzet)

Official announcement: Large French multinational is closing its legendary factory in Hungary - those who can can go to work in Germany (Vilaggazdasag)

Brussels continues to blackmail: Flow of EU funds has almost completely stopped, only cents have been coming for months (Vilaggazdasag)

Hungary is already fifth in EU employment ranking - we have never been so good (Vilaggazdasag)

PM Viktor Orban's announcement could help small construction businesses (Vilaggazdasag)

American Charge d'Affaires in Budapest: No more public insults and moralising, this era is over (Heti Vilaggazdasag)

At least HUF 1.3tn of EU funds may have leaked into the pockets of 13 NER contractors (Heti Vilaggazdasag)

PM's political director Balazs Orban on Pride: This is good and important battle for government side (Heti Vilaggazdasag)

Malfunction occurred at MOL's Szazhalombatta refinery, flaring has started, smoke is rising (Heti Vilaggazdasag)

• Preferential housing loans to carry 3% interest rate with no eligibility conditions
• State expected to reimburse banks for preferential loan rate

The government will provide preferential housing loans to families for the purchase of their first home, PM Viktor Orban announced in a social media post. There will be no eligibility restrictions regarding who could apply for the loan, he underlined, saying that details will be coming soon. The loan will carry a preferential interest rate of 3%, he said. The state will reimburse banks for the difference between the preferential rate and the market interest rate, according to information of the news portal Portfolio. The budgetary cost of such a measure could be thus marginal in the short term but will accumulate gradually in the next years, the portal commented. PM Office head Gergely Gulyas will most likely provide further insight during the government's regular press conference tomorrow, we think.

The government has already implemented a preferential housing loan programme as part of its affordable housing policy. The existing programme, however, is subject to a number of restrictions, including an age restriction and a requirement for green housing purchase. The interest rate on these loans is a maximum of 5%, capped by lending banks on a voluntary basis, but is applicable only for the first five years, while the loans are not subject to origination, assessment or any other bank fees. The application window for this programme is Apr 1-Oct 31, 2025.

• Yield falls from previous auction, in contrast to trend of three-month yield

The State Debt Management Agency (AKK) sold HUF 30.0bn of six-month T-bills on the latest primary auction, AKK data showed. The issued amount was in line with the announced auction size amid favourable, but slower demand for the securities. Total bids stood at HUF 59.9bn and declined visibly compared to the previous tender a couple of weeks ago. Demand translated into a coverage ratio of 2.0x over the original supply. The average yield came at 6.10%, down by 3bps from the previous auction in contrast to the hike of the three-month yield on yesterday's auction. The six-month yield was unchanged compared to the secondary market benchmark rate.

Closing the border will mean real losses [real losses to hit local businesses as govt responds to PiS propaganda; losses to come as border closed in relation to Germany sending back 314 migrants this year, a very small number in the scheme of things] (Rzeczpospolita)

Border Defense Movement wins few friends at border [but radical politics could lead to real economic losses] (Rzeczpospolita)

Campaign for Sejm has begun [restoring controls on border is de facto start of campaign ahead of elections due by autumn 2027 but possible anytime; KO wants to show it is tougher than PiS was; PSL wants to show it is the conservative anchor of coalition; PiS wants to show it is harder than Konfederacja; PiS wants to ban people from Africa and Middle East from entering PL] (Rzeczpospolita)

PiS wants a ban on migrants to Poland (Gazeta Wyborcza)

Credit costs to fall slightly, will they fall more? [rate cut left to Pg 2 of business section] (Rzeczpospolita)

USA suspends military support for Ukraine -- White House washes its hands [Ukrainians warn that if Patriot missiles aren't sent, Russia will be able to devastate every city in Ukraine, leading to scores of dead civilians] (Gazeta Wyborcza)

Donald Trump abandons Ukraine (Rzeczpospolita)

Poland is against ETS2 [govt wants to abolish or ease heating charge to go into effect in 2027; CO2 emission trading system is also to cover households, road transport, and small industry, leading to big rises in diesel costs as well heating ones; govt wanted to postpone system for 3Y but now is against it] (Rzeczpospolita)

Constitutional Tribunal judge Pawlowicz moves to retirement due to help [Pawlowicz is very controversial Tribunal judge and former controversial PiS MP] (Gazeta Wyborcza)

Apolitical minister failed as state asset minister [State Asset Minister Jaworowski to lose his position in reshuffle, according to GW sources] (Gazeta Wyborcza)

Heat wave hits Poland as well (Gazeta Wyborcza)

• Next MPC meeting: Sep 2-3, 2025
• Current policy rate: 5.00%
• EmergingMarketWatch forecast: 5.00%

Rationale: The Monetary Policy Council decided to surprise with its July decision and cut rates by 25bps, bringing the key rate down to 5.00%, the lowest since April 2022. The consensus had been firmly for no change, and we had also believed the council would hold. CPI inflation of 4.1% y/y remains above the 2.5% target and above the 3.5% top end of the band around the target, though it is set to slow sharply in the summer due to a high base and lower natural gas prices. The power price outlook is likely benign, but the no-policy change path would still suggest room for a price hike in Q4. Fiscal policy remains loose and it is anyone's guess what the Finance Ministry will do with the deficit considering the high political pressure on the ruling coalition after its loss in the presidential election.

The MPC said in its post-sitting statement that the cut rested on the fact that CPI inflation would fall into the range around its 2.5% +/- 1pp target in the coming months. It also approved a new inflation projection that sharply lowered the inflation path and cut the GDP growth projection for 2025. The updated July Inflation Report contains an inflation projection that shows inflation at 3.5-4.4% in 2025, creating a mid-point of 3.95% that is down a sharp 0.95pp from 4.90% in March (range: 4.9-5.7%). That massive March inflation projection overshoot is clearly one reason behind the July cut. The 2026 inflation projection lowered the mid-point by 0.30pp and the 2027 one cut it by 0.15pp, meaning the entire inflation trajectory was shifted downward. Moreover, the 2027 inflation projection mid-point is 2.35%, which is below the target, which undoubtedly helped prompt the cut as well.

In terms of the economy, the new GDP growth projection for 2025 is a range of 2.9-4.3%, giving a mid-point of 3.60%, which is down from 3.75% in March (range: 2.9-4.6%). The inflation projection had a data cutoff date of Jun 9, which is much earlier than usual. But since then, the economic data has been soft, the Middle East war did push up oil prices, though the PMI reading for June was dismal.

One thing to stress is that the MPC termed its July cut in the "adjustment" category it used to describe its May cut by 50bps and this is MPC speak for meaning an easing cycle has not started. That obscures the outlook for the September meeting further.

The power price outlook likewise continues to be a question. The government wants to extend the price cap through Q4, though it contained the relevant legislation in the windfarm bill. The problem is President Andrzej Duda is likely to veto it as the right doesn't like wind power. This will mean the Q4 power price will depend on the new power tariff to be approved for Q4. The daily Rzeczpospolita recently cited unnamed companies saying the tariff should be PLN 540/MWh, which is above the PLN 500/MWh cap, but others say the tariff should be no higher than PLN 500/MWh. There is thus some uncertainty, which probably won't be cleared up until in September.

The fiscal outlook should be clearer by the Sep 2-3 sitting since the government is likely to approve the 2026 state budget bill in late August. It is unclear what the government will do due to the many political uncertainties. On one hand, it originally said it would cut the deficit by 1pp of GDP in 2026, but whether that goal remains is hard to say. It has also said it continues to look at doubling the standard tax deduction by the autumn 2027 election, and that costs 1.5% of GDP by itself. That there is an EU defense spending exit clause makes the situation all the more uncertain. We imagine the FinMin will propose to cut the deficit by something like 0.5-0.7pp and put off the tax deduction decision to 2026.

Overall, MPC member Ludwik Kotecki said at one point that the council could cut by 25bps in July or September, and it is possible that the July cut means the council will not move in September, instead waiting for power and fiscal uncertainties to be cleared up ahead of the October policy meeting. That the MPC described the July cut as 'adjustment' also suggests September caution. But with the lack of a broader explanation behind the July cut, NBP and MPC chair Adam Glapinski's presser on Thurs. becomes even more important. For now, we imagine the council will hold in September and cut again in October, but all could change depending on what Glapinski says.

Archived video of all MPC press conferences

MPC's post-sitting statements

Latest council minutes

Latest NBP inflation report (March 2025)

Most recent MPC voting results

• MPC says benign inflation outlook made it necessary to "adjust" rates down
• MPC approves new projection that cuts inflation trajectory across horizon
• New projection lowers GDP growth horizon for 2025, but ups it later

The Monetary Policy Council said in its post-sitting statement that because available forecasts are that CPI inflation in the coming months will fall below the upper 3.5% bound of deviations around the NBP inflation target of 2.5%, it became justified to "adjust" the level of the NBP interest rates down by 25bps. The paragraph defending the cut did not contain any other information, though of course calling the cut an 'adjustment' is MPC parlance for not necessarily meaning it has begun an easing cycle, though the 25-bp cut on Wed. brings to 75bps the scale of adjustment so far. The MPC did approve a new Inflation Report that contained a more benign inflation trajectory, especially for 2025, and a mixed GDP view, though one that cut the expected growth in 2025.

The updated inflation projection (cutoff date way back on Jun 9) saw a 50% chance that with a key rate of 5.25% CPI inflation will range from 3.5% to 4.4% in 2025. That creates a mid-point of 3.95%, which is down a sharp 0.95pp from 4.90% in March (range: 4.9-5.7%). It was clear from right after the March projection was released that the projection then was way too high, but this nearly 1-pp cut in the path is very sharp indeed. For 2026, the new range is 1.7-4.5%, giving a mid-point of 3.10%. That is down 0.30pp from 3.40% in March (range: 2.0-4.8%). Finally for 2027, the new range is 0.9-3.8%, generating a mid-point of 2.35%. That is down 0.15pp from 2.50% in March (range: 1.1-3.9%), but also means that the central medium-term inflation projection is for inflation below the target, which undoubtedly helped prompt the cut.

In terms of the economy, the new GDP growth projection for 2025 is a range of 2.9-4.3%, giving a mid-point of 3.60%, which is down from 3.75% in March (range: 2.9-4.6%). In 2026, the GDP range is 2.1-4.1%, producing a mid-point of 3.10%. That is up 0.15pp from 2.95% in March (range: 1.9-4.0%). For 2027, the new range is 1.3-3.7%, generating a mid-point of 2.50%. That is up 0.20pp from 2.30% in March (range: 1.3-3.7%).

The council did likewise include the usual paragraph that further decisions will depend on incoming information regarding prospects for inflation and economic activity. But there wasn't much more to go on.

Overall, the MPC cut its key rate by 25bps due to the prospect that inflation will fall to below 3.5% y/y in the summer due to the high base and the cutting of natural gas prices. That much is clear. The MPC does seem to consider this an 'adjustment' rather than necessarily the start of an easing cycle, obscuring the outlook. Not too much more was given on that outlook, but this means NBP and MPC chair Adam Glapinski's press conference on Thurs. at 15:00 CET will be key in whether the council will want to take a pause at its next policy sitting on Sep 2-3 or will be willing to cut again in what would mean the de facto start of an easing cycle. For now, we imagine the MPC will pause, but much will depend on what Glapinski says.

• Post-sitting statement to be published at 16:15 CET
• Glapinski to hold his presser on Thurs. at 15:00 CET

Poland's Monetary Policy Council decided Wed. to surprise the consensus for no change by cutting its key rate by 25bps to 5.00%, according to a statement. The MPC will publish its post-sitting statement at 16:15 CET. The decision came out relatively late, with each minute of lateness increasing the chance of the surprise that eventually came. The council did approve a new Inflation Report, though, and sometimes that does lead to a late decision. NBP and MPC head Adam Glapinski will give his monthly press conference on Thurs. at 15:00 CET to further explain the move.

Data Download

Overall, the MPC had at one point looked like it might cut its key rate by 25bps in July, but then the consensus shifted to no cut as the power price outlook remained unclear, tensions in the Middle East hit oil prices, fiscal policy remained a big question mark, and MPC members talked hawkishly. But the MPC did approve the new Inflation Report at the sitting, including new CPI projection. It was always possible that if that projection proved very dovish, the MPC might have no choice but to cut. It is also true that the MPC has surprised with most of its recent decisions, and it will have to be taken into account in the future that surprise is part of the MPC's reaction function.

The question now is whether there is still room to cut at the next policy sitting on Sep 2-3 [August doesn't see a policy sitting. We had believed the MPC would wait till September to cut since more info will be available and CPI inflation will go to 3% or below in the summer. Now that the MPC has brought the scale of easing (or its "adjustment," depending on the terminology it uses to describe the latest cut) to 75bps, it will be key to see how the cut is characterised and what Glapinski says on Thurs. We imagine that with the July cut, this lowers the chance for a September move, but still see room for at least 50bps of cuts this year.

• Non-sa jobless rate falls 0.2pp m/m to 3.1% in the month

Poland's EU-harmonised unemployment rate held at 3.3% in May, the same as in April, according to seasonally but not calendar-adjusted Eurostat data published Wed. The jobless rate rose 0.5pp y/y from 2.8% the year before. The seasonally adjusted unemployment number was 585,000 in May, which was up from 579,000 in April and up from 502,000 the year before.

The non-adjusted unemployment rate fell 0.2pp m/m to 3.1% in May from 3.3% in April. The unseasonally adjusted jobless rate remains well below the 5.0% registered unemployment rate reported for April by Statistics Poland (GUS) on the basis of labour office data. The unadjusted Eurostat-reported unemployment total was 554,000. The registered unemployment total reported by GUS was 782,800 for May, GUS said.

In terms of accurately showing unemployed workers seeking jobs, the Eurostat data are probably better than the GUS data. The jobless rate there includes anyone from 15 to 74 without work, available to start within 2 weeks, and who has actively looked for a job in the previous 4 weeks. The local figure reported by the Central Statistical Office defines the unemployed as those 18-60 (women) or 18-65 (men) who have registered as unemployed within the previous 12 months and doesn't receive income totaling more than half the minimum or are not on family or pension subsidies.

• Holownia notes there are doubts about status of Supreme Court chamber that validated runoff
• But he says there are no doubts that PiS-backed Nawrocki won Jun 1 runoff

Sejm Speaker Szymon Holownia, a leading member of the Civic Coalition (KO)-led ruling coalition, said that he would not hesitate to call the National Assembly on Aug 6 in order to swear in President-elect Karol Nawrocki, according to a post on X made late Tues. Holownia said that though there are doubts about the status of the Supreme Court Chamber of Extraordinary Control and Public Affairs, which ruled Tues. the Jun 1 presidential election runoff was valid, he said there was no doubt Poles had elected Nawrocki. "That is why on August 6, I will convene the National Assembly and receive the presidential oath from Karol Nawrocki," he said.

Holownia did note that any irregularity in electoral committees would be dutifully explained by the prosecutor's office, but the presidential election period marked by allies of PiS behaving in extremely political ways must end and everyone had to "get back to work."

Overall, the KO has been most adamant about somewhat questioning the election result after some irregularities arose where votes for its candidate, Rafal Trzaskowski, were given to Nawrocki, but the scale of the problems have been ruled not enough to overturn the result. The junior coalition partners, including Holownia's Polska 2050, have been less keen on this avenue of attack. Nawrocki will thus be sworn in on Aug 6, and Holownia will not choose to potentially delay calling the National Assembly and delay the changeover from Andrzej Duda to Nawrocki. The key political question now is how the ruling coalition's government reshuffle will go, and then whether the coalition will be able to recover support or whether PiS and the far right Konfederacja will remain most popular running toward a general election due in autumn 2027 but which might happen earlier.

• All sectors add pressure except non-durables, which slow slightly
• Energy goods inflation rises to 24.2% y/y amid Middle East disruptions
• Rising energy, intermediate inputs reignite cost-push wave, threatening disinflation path, in our view

The domestic producer price index (D-PPI) increased by 24.5% y/y in June, up from 23.1% y/y in the preceding month, marking a sustained upward trajectory for the second consecutive month, Turkstat data indicated. The index also registered a 2.5% m/m uptick, achieving a third successive m/m increase exceeding 2%, which has resulted in an aggregate expansion of 15.7% since the beginning of the year, we note.

Data Download

All sectors contributed to the y/y rise, with the exception of non-durable goods inflation, which moderated to 26.5% y/y in June. Conversely, inflation for energy goods exhibited a sharp acceleration, reaching 24.2% y/y. We attribute this sharp rise to the transient geopolitical tensions in the Middle East, which have precipitated elevated energy costs. Additionally, intermediate goods prices saw a significant uptick to 21.8% y/y during the same period. The increments in inflation for durable goods and capital goods, however, remained relatively restrained.

June's data, in our assessment, revealed that upstream cost pressures are re-intensifying in a manner liable to frustrate the disinflation timetable. In this context, particularly, the renewed climb in energy and intermediate inputs signals fresh cost-push momentum that firms will feel compelled to pass through, while the softening in non-durables appears too narrow to offset the broader impulse, we assess.

• Services inflation drives headline figures with robust demand surges
• Food reprieve masks entrenched services-driven inertia, keeping core pressures elevated
• Rent and transport costs accelerate, fuelling broad second-round price momentum

The headline inflation rate saw a marginal deceleration to 35.1% y/y in June from 35.4% y/y in the preceding month, Turkstat data showed. This reflected a CPI expansion of 1.4% m/m, falling short of the Bloomberg survey median of 1.6% m/m and the AA Finance forecast of 1.5% m/m, we note. Furthermore, the Turkstat figure for this month was below ITO's reported 1.8% m/m. Based on our proprietary Tramo-Seats methodology with a direct approach, we project that the seasonally-adjusted monthly inflation to be published tomorrow will register at 2.1% m/m.

Data Download

The primary driver of the increase in headline figures was the 2.7% m/m services inflation. Within this category, transportation services inflation rose by 4.0% m/m, a rise we attribute to heightened travel demand during the Eid-Al Adha holiday. Rent inflation increased by 4.0% m/m in June, with other services and the hotels, cafes, and restaurants sector following at 2.3% m/m and 2.1% m/m, respectively.

Goods inflation was recorded at 0.7% m/m. On a sectoral basis, energy inflation was up by 2.3% m/m in June, a development we associate with the transient conflict in the Middle East. It is particularly noteworthy that food and non-alcoholic beverages inflation registered a decline of 0.3% m/m in June. This figure presented a stark contrast to the 4.4% m/m food inflation in Ankara and the 1.9% m/m increase reported by ITO for Istanbul during the same period. The Turkstat data specifically indicated a 1.9% m/m decrease in the prices of fresh fruits and vegetables. This aligns with the CBT's prior assessment that falling vegetable prices would likely counteract rising fruit prices. The outcome, however, appeared to have surpassed these expectations, effectively defying the anticipated nationwide supply disruptions caused by frost, we note.

Core C inflation advanced to 35.6% y/y in June, up from 35.4% y/y in the previous month, while core D inflation held steady at 36.0% y/y. Apparently both of these core indicators remained above the headline inflation rate.

The deceleration in annual consumer inflation was chiefly driven by a modest 14.5% y/y expansion in clothing prices and an 18.4% y/y increase in communication prices. Conversely, education and housing inflation were at the forefront of price increases, with rates of 73.3% y/y and 65.5% y/y respectively, for the month.

In our assessment, June's print reveals a transitory respite rather than a structural shift. Headline deceleration owes more to fleeting food-price relief and a holiday-related demand surge rotating spending into services than to a broad-based cooling in price dynamics, we assess. Core metrics continue to outpace the headline, underlining embedded inertia in rents, transportation and energy that monetary restraint has yet to tame, we think. Similarly, the anticipated seasonal adjustment print may risk overshooting the CBT's glide-path, we note.

First statement from Izmir's detained ex-mayor Tunc Soyer (Hurriyet)

AKP reacts sharply to CHP leader Ozgur Ozel's 'junta rule' words (Hurriyet)

New details in corruption investigation into Izmir municipality: Alleged escape to Greece (Hurriyet)

New term summit with Iraq (Hurriyet)

Amount of gold under pillow in Turkey is estimated to be USD 331bn (Sozcu)

Chairman of Turkish Exporters Assembly (TIM) Mustafa Gultepe: Half of 26 sectors are in negative territory (Sozcu)

Price increase champion in Istanbul in June is cherry with rate of 44.29% (Sozcu)

Tourism minister Mehmet Nuri Ersoy: We will make Hakkari tourism city (Sabah)

Defence industry exports in June are USD 623mn (Sabah)

Vice President Cevdet Yilmaz on export figures: Highest level in history is reached in annualised terms (Sabah)

Sales of electric cars under 160KWs increase by 104.3% y/y in June (Sabah)

Question:

How much indirect impact do you estimate on the CPI?

The question was asked in relation to the following story: BOTAS hikes residential gas tariffs by 24.6%, industrial tariffs by 7.9% in July

Answer:

We note quantifying the indirect effects is non-trivial.

In this regard, this study offers a useful benchmark. Table 1 shows that the indirect pass-through from natural-gas tariff changes amounts to at least one-half of their direct contribution, implying an additional impact of ≥ 0.23pps. Hence, the combined net and indirect influence should be no less than 0.7pps based on the paper.

Note, however, that the research is conducted in 2020, and VAR coefficients are highly sample-sensitive, to the best of our knowledge. For a precise, up-to-date estimate, we recommend replicating the analysis with the latest observations.

• Next MPC meeting: Jul 24, 2025
• Current policy rate: 46.0%
• EmergingMarketWatch forecast: Cut by 250-350bps
• Rationale: Improving inflation and moderating domestic demand could potentially prompt policy rate decrease

The CBT is positioning itself for a policy rate reduction in July, with a prospective cut ranging, in our view, from 250bps to 350bps. The MPC already acknowledged a significant amelioration in the core inflation trajectory in May, with subsequent indicators suggesting this downward momentum carried into June. The MPC's analysis, we think, highlighted favourable developments in the macroeconomic picture, especially the moderation of domestic demand dynamics observed in Q2. However, the committee remained circumspect, we note, identifying external variables that demanded vigilant oversight. These included the transient geopolitical frictions in the Middle East and the intensification of protectionist trade policies globally, which presented potential impediments to the disinflation process. On the domestic front, entrenched inflation expectations and prevailing pricing behaviour continued to constitute material risks to the attainment of price stability, the MPC noted.

Data Download

Against this background, the impending inflation data for June from Turkstat will be a pivotal determinant for CBT's decision, we assess. Leading indicators from the ITO, which showed a 1.8% m/m increase in June inflation for Istanbul, fell below the five-year average for the month, suggesting the official Turkstat figures may affirm a disinflationary trend, we think. A June inflation rate of approximately 1.6% m/m, which would be congruent with the market consensus, would solidify the ongoing annual disinflationary trend and could justify a more decisive 350bps rate cut by the CBT, in our view. We think the rationale for such a front-loaded adjustment is amplified by the absence of an MPC meeting in August, with the subsequent meeting slated for Sep 11.

Conversely, such an action is not without its risks, we note. The magnitude of the initial cut in an easing cycle is instrumental in anchoring expectations. Therefore, an aggressive reduction could precipitate a rapid loosening of financial conditions, potentially terminating the targeted economic cooling prematurely. Furthermore, despite improving inflation expectations, the inherent volatility in food and energy prices persists. Countervailing inflationary pressures also merit serious consideration, in our opinion. BOTAS enacted a significant upward adjustment to wholesale natural gas tariffs, which will translate into higher consumer inflation. Furthermore, anticipated OTV revisions, sequenced after the dissemination of June inflation data, are poised to impart both direct and indirect inflationary impetus in July, we note. Considering this confluence of factors, a more prudent course of action for the CBRT would be to implement a more conservative 250bps reduction, thereby balancing the progress on disinflation against newly emerging price pressures.

Summary of June rate-setting meeting

MPC rate decision in June

Quarterly Inflation Report for Q2

Monetary policy strategy for 2025

Cold wave pushes gas consumption to record levels (La Nación)

The government ordered the interruption of gas supply to industries to ensure households and hospitals are not left without it (Infobae)

Chaos in the lower house: session collapsed amid shouting and insults between Kirchnerism and La Libertad Avanza (La Nación)

In a Congress session that ended in scandal, the opposition pushed forward two uncomfortable issues for the government (Infobae)

Pensions, Libra scandal, and the governors' threat: the agenda Congress uses to corner Milei (Clarin)

Warning sign for the government in the Senate: broad opposition majority presented two bills to fund provinces (Infobae)

Lula Da Silva arrived in Buenos Aires for the Mercosur summit and confirmed he will visit Cristina Kirchner (Infobae)

Mercosur: Argentina secured Brazil's support to lower tariffs for the United States (Clarin)

Mercosur signs free trade agreement with four European countries (Clarin)

• Argentina mainly exports gold to Switzerland

The Mercosur bloc announced Wed. the completion of negotiations with the European Free Trade Association (EFTA) for a free trade agreement, according to a press release. The deal covers trade in goods and services, investment, intellectual property, public procurement, rules of origin, and dispute resolution, among other areas. Both sides would gain improved market access for over 97% of their exports.

The agreement would take effect three months after ratification by member countries.

Argentina's main trade partner among the four EFTA members is Switzerland, which received USD 985mn in exports from Jan-May, nearly all of it gold. Imports from Switzerland totaled USD 273mn and were mostly immunological products. Local authorities have not yet commented on specific industries expected to benefit from this deal.

• Caputo challenges those who believe the ARS is too strong to buy USD
• Caputo says CA deficit is small and desirable for an economy needing capitalization

Economy Minister Luis Caputo said the government is not concerned about the CA deficit or the exchange rate level, and argued that Argentina is not even close to having a problem on this front, according to comments made late Tues. at a business conference. On the exchange rate, Caputo said Argentina's structural transformation and excellent prospects explain the strengthening of the currency since President Javier Milei took office, and noted that the official exchange rate is more attractive now than it was before the exit from the crawling peg regime three months ago. The minister said he is tired of hearing economists who don't know anything say that the exchange rate is too strong, and challenged anyone who believes the same to just take advantage of the opportunity and buy US dollars.

On the CA deficit, Caputo said Argentina is in line for a small deficit of 1.5%-2.0% of GDP. He argued that it is natural and desirable for an undercapitalized economy like Argentina's to run a CA deficit at this stage. Moreover, he said it's hard to see a problem with this in an economy slated to grow at 6%, with a government that reduced its public debt by USD 50bn, which means that the CA deficit is purely a reflection of private sector transactions.

Caputo also discussed FX reserves, repeating that the Treasury will be the one acquiring USD for the public sector moving forward, because it is the Treasury who has FX debts to pay. He said the accumulation will take place through different avenues, such as income from privatizations, asset sales, concessions, and block purchases from provinces and companies. Surprisingly, he did not mention the most used option so far, which is the issuance of local currency bonds with USD subscription. While we expect these issuances to continue, there was no offer of a bond with USD subscription in the last auction.

Overall, we believe Caputo's arguments to dismiss concerns about the CA deficit are weak. We would project it much higher than 2.0% of GDP at this REER, consumption is a much bigger driver of the deficit than capital imports, the economy is not expected to grow 6.0% after the 2025 rebound ends, and the CA deficit resulting from private sector transactions doesn't preclude it from becoming problematic. On FX reserves, we would expect the avenues to acquire reserves that the minister mentioned to be too small for what Argentina needs.

Lula says [Speaker] Motta failed to comply with agreement and overturning IOF was absurd (Agência Brasil)

AGU says Lula should meet Hugo and Alcolumbre after BRICS [summit] (CNN Brasil)

BCB needs plenty of time to observe data evolution, says Copom director David (Terra)

I don't think IOF can get in the way of income reform, says Haddad (Poder360)

'IOF issue isn't economic or political, it's legal,' says Haddad (O Globo)

Finance secretary [Durigan] meets with deputies and discusses cutting tax benefits (G1)

Government presents plan to compensate victims of undue INSS [social security] deductions (Gazeta do Povo)

Away from the public agenda in July, Bolsonaro has 'intense esophagitis' (UOL)

Mercosur reaches agreement with EFTA during meeting in Argentina (Correio Braziliense)

• David says Copom needs time to see inflation converging to target
• David says Copom members agree Selic is at a restrictive level

BCB Monetary Policy Direction Nilton David said Wed. that the monetary tightening implemented by the BCB is working, according to remarks at a Citi-hosted event. David stated that the Copom needs time to observe inflation converging to the 3.0% target, reinforcing the committee's commitment to price control. He also said l that there is consensus among Copom members that the Selic is currently at a restrictive level.

Overall, the BCB has hiked the Selic by 450bps since September 2024, bringing the rate to 15.00%, its highest level since 2006. The latest 25-bp hike, delivered at the June policy meeting, was motivated by still resilient economic activity and persistent inflation expectation de-anchoring. David's remarks reaffirm the BCB's latest minutes and its signal that the Selic will remain at a restrictive level for a prolonged period and until inflation is firmly on track to converge to the target. In our view, the Copom is likely to hold the Selic at the current level at least until the end of Q1 2026.

• Lula says he wouldn't be able to govern if he hadn't taken the issue to STF
• Lula criticizes Speaker Motta for failing to comply with previous IOF agreement

President Lula da Silva said Wed. that the government's appeal to the Supreme Federal Court (STF) aims to ensure governability, claiming that he "wouldn't be able to govern" if he hadn't done so, according to an interview with TV Bahia. Lula also criticized Chamber of Deputies Speaker Hugo Motta for failing to comply with the agreement previously reached with the government on the IOF issue. That agreement included adjustments to the IOF measure and alternative measures to replace the adjustment. The lower house had also seemed to give the government two weeks to present spending cuts, but then moved suddenly last week to repeal the IOF hikes outright.

Overall, the government appealed Tues. to the STF to reverse the IOF repeal, arguing that the measure was unconstitutional since the executive has the legal authority to make adjustments to the tax. Reactions in Congress have been mixed. Speaker Hugo Motta criticized the government's "us vs. them" narrative, but Senate leader Davi Alcolumbre said it is within the government's rights to bring the matter to the court.

While the government frames the IOF adjustment and broader revenue-raising measures as tools to promote social justice, members of Congress argue that the population cannot bear any further tax increases. In our view, the government's lack of a solid support base in Congress increases the likelihood of obstacles to its economic agenda as the 2026 elections approach. Still, all previous disputes have ultimately been resolved through negotiation, suggesting that a political solution to this issue remains possible, even if it remains unclear what form a deal might take. A potential solution is, however, unlikely to result in effective fiscal measures before the 2026 elections, meaning Brazil will need a fiscal contraction after the next vote.

• Industrial output rises 3.3% y/y in April following revised 0.5% decline in Apr, coming in below consensus for 3.5% increase
• Industrial output falls 0.5% m/m in May, marking second consecutive monthly decline
• Industrial output rises 1.8% y/y in Jan-May

Industrial production in Brazil rose by 3.3% y/y in May, recovering from a revised 0.5% decline in April to match the consensus expectation, according to data released Wed. by the stats office IBGE. The IBGE attributed the positive result to the low base given that industrial output fell 1.2% y/y a year earlier. Mining output rose 8.7% y/y in May and manufacturing grew by 2.3%, both rebounding from declines before. In Jan-May, industrial output rose by 1.8% y/y.

Data Download

Some 19 of the 25 activities monitored recorded y/y growth in May, which is significantly above the 9 that did the same in April, though this was helped by the low base. The largest positive influence came from vehicles (+12.2% y/y), machinery and equipment (+12.6%), and chemical products (+6.8%). Food rose by 1.9% y/y in May, following a 5.0% decline the month before. On the negative side, the largest negative influence came from coke and oil refining (-7.2% y/y).

In terms of goods, durable goods saw the biggest y/y increase, rising 15.4% y/y in May (after a 10.6% y/y decline the year before), followed by intermediate goods (+5.4%) and capital goods (+0.8%). Meanwhile, consumer goods' output fell by 0.5% y/y in May and non-durable goods dropped by 0.3%, both marking the second consecutive declines.

On a monthly basis, industrial output fell 0.5% m/m in May after a revised 0.2% decline in April, in line with expectations. The drop was driven mainly by lower vehicle production, according to the IBGE. The decline was 1.1% m/m the year before.

Overall, the yearly rise in industrial output was mostly due to a low base while the monthly data reflect a softening trend, with two consecutive monthly contractions partially offsetting the 1.5% y/y gain recorded in Q1. The data support the BCB's expectation of a gradual economic slowdown in the coming quarters due to its restrictive monetary policy. The central bank expects industrial production growth to decelerate to 1.9% in 2025 from 3.3% in 2024.

• MPC meeting: Jul 30-31, 2025
• Current policy rate: 15.00%
• EmergingMarketWatch forecast: Hold

The BCB expects inflation to reach 4.9% in 2025, exceeding the 4.50% upper limit of the +/- 1.50-pp fluctuation band around the 3.00% target, but sees economic activity slowing down in the coming quarters, according to its May Monetary Policy Report. The inflation forecast marked a downward revision from the 5.1% given in March due to currency appreciation and lower international oil prices. The BCB said it expects inflation to fall below the upper limit only by Q1 2026. For the economy, the BCB raised its GDP growth forecast for 2025 to 2.1% from the previous 1.9% following stronger-than expected growth in Q1. Its restrictive monetary policy, reduced idleness of production factors, moderating global growth, and waning agricultural momentum are expected to contribute to an economic slowdown in the coming quarters, and the BCB indicated that its surprise 25-bp hike of the Selic rate in June to 15.00% marked the end of its tightening cycle.

Inflation has been showing easing signs for a couple of months already but remains above the 4.50% limit. The 12-month cumulative IPCA-15 reading for June slowed to 5.27% y/y, as the ongoing record harvest contributed to easing food prices. Despite the deceleration, the inflation preview for June strengthens the expectations that the official IPCA figure will exceed the target in June, which will prompt BCB Governor Gabriel Galípolo to have to send a formal letter to Finance Minister Fernando Haddad explaining the reasons for the excessive inflation and outlining the inflation outlook. The official IPCA data will be released on Jul 10 by the stats office IBGE, and the letter is expected to be published on the same day.

The government's fiscal policy has been in the political spotlight of late after Congress repealed last week the decree that raised the IOF tax. The government challenged the move in the Supreme Court, seeking to secure the revenue needed to meet the zero primary deficit target for 2025. Despite political discussions around fiscal matters, the government is still likely to meet this year's target, though at the lower end of the allowed band (+/- 0.25% of GDP around the target). However, the outlook has become increasingly challenging for 2026 as new revenue sources are likely to be repealed by Congress and the government continues to avoid presenting expenditure cuts, instead trying to hammer home a 'social justice' narrative ahead of 2026, an election year. Effective cuts to ease long-term spending pressure are considered highly unlikely by this government. The lack of fiscal credibility will likely weigh on asset prices and require the BCB to maintain its tight monetary policy for an extended period, in our view.

Overall, easing inflation and expectations of economic deceleration support the BCB's prior signal that the tightening cycle, which began in September 2024, has ended. BCB Monetary Policy Director Diogo Guillen said recently the BCB is not yet discussing an easing cycle, reinforcing the message that the Selic will remain at a restrictive level for a "very" prolonged period. The easing cycle is expected to begin only in 2026, but even then, monetary policy will remain restrictive, with forecasts indicating only 250bps of cuts, thereby potentially taking the Selic rate down to 12.50% at end-2026.

BYD cancels plan to build a factory in Mexico because of Trump's tariff threat (El Economista)

Fitch changes its outlook for the Mexican banking system from neutral to negative (La Jornada)

Trump scares off migrants; illegal crossings at the Mexico-US border fall to historic lows (El Financiero)

Mexico negotiates with the US to avoid a 20.91% tariff on tomatoes, seeks deal by July 15 (El Economista)

[Whip says] MORENA will prioritize the 40hrs working-week and the electoral reform in Congress (Reforma)

Electoral institute fines parties for more than MXN 31mn; PT and the PRI have the most irregularities (La Jornada)

Treasury uses MXN 17,995mn from Banxico to pay part of its debt (Eje Central)

MORENA moves to strip PRI President Alito of his immunity (Político MX)

• Third decline in a row suggest of weakening conditions in the domestic market

Domestic auto sales plummeted by 5.9% y/y in June, to 116,059 units, per data published by the stats office INEGI on Wednesday. This is the third contraction in a row, showing worsening conditions in the domestic market during Q2. Indeed, this is the worst fall so far in the year, with accumulated sales down 0.2% y/y in H1, despite a strong Q1.

Overall, the setback is not too surprising, considering several factors are clouding the mid-term outlook for the economy, amid potential tariffs imposed by the US, and amid a power grab by the MORENA regime that is now to control the judiciary. Still, the poor dynamism posted in Q2 exceeds any setback shown by private demand fundamentals, in our view, with the labor market still showing resilience to a slowing economy.

• Next MPC meeting: August 7
• Current policy rate: 8.00%
• EmergingMarketWatch forecast: 25bps cut

While announcing a new 50bps cut on June 26, the CB was clear to say further monetary easing would come, while changing the tone to suggest slower easing ahead, per our read of the sitting's statement. With this, the CB brought the Monetary Policy Rate (MPR) down to 8.00%, as expected. This adds to 300bps easing since the cycle began in August, and 200bps since February, when the Monetary Policy Council (MPC) agreed to speed up the easing.

Data Download

Upholding rapid easing in June was agreed by four of the five MPC members, as we expected, with Deputy Governor Jonathan Heath. This is consistent with a very dovish board that seems very willing to overlook inflationary pressures and the fact that mid-term expectations are not well anchored at the CB's 3.00% CPI inflation punctual target.

As the board anticipates, it's clear the CB will be slowing its easing in Q3. However, it remains to be seen if some board members begin to ponder pausing the easing cycle. Indeed, we'll be looking at the sitting's minute, to be published on July 10, to see if any of the kingmakers (Deputy Governor Galia Borja and José Gabriel Cuadra) begin to ponder such pauses. Moreover, it will be crucial to see how the CB sees the ex-ante rate and the need to keep the policy rate on restrictive territory.

We are confident the CB will cut its MPR by 25bps on August 7, considering the dovish position of the bulk of the board. We expect the CB will cut its policy rate by 25bps on September 25, bringing down the policy rate to 7.50% by Q3-end. However, this might depend on the dovish position of the kingmakers and the pace of CPI inflation, as further worrying prints could push the less dovish side of the board to agree to pause the cycle. On the other hand, although they shouldn't, some board members may be willing to pay little attention to accelerating inflation if it coincides with an economy entering a recession, arguing about the disinflationary effects of slowing activity.

Data Download

After CPI inflation accelerated to 4.42% y/y in May, it accelerated to 4.51% y/y in June H1, upholding worrying dynamism, in our view. These results are way off from the CB's 3.00% target, with core inflation adding two fortnights above 4.00%, showing it is on no path to converge to said target. This pushed the CB to revise its CPI inflation forecasts for the next four quarters; however, showing they believe this recent pressure is transitory, the CB continues to predict CPI inflation will converge to the punctual target by Q3 2026. This absolutely diverges from the market expectations, with analysts seeing CPI inflation closing 2026 at 3.74%, slowing modestly but remaining well above the punctual target.

Overall, we expect the CB will cut its policy rate by 50bps in Q3. There is a chance of only one 25bps cut; however, this would be surprising to us, considering the dovish tone held by the bulk of the board. We expect the easing to come from a divided board; probably with only Deputy Governor Heath breaking ranks, it will be very interesting if either Borja or Cuadra join Heath in disregarded further easing in Q3. We expect the CB will be discussing pausing its easing cycle in Q3, particularly if CPI inflation remains high. Thus, it's very possible that Banxico will not be cutting its MPR during all the remaining 2025 sittings. Thus, depending on the pace of CPI inflation and mid-term expectations, we expect the policy rate to close the year at 7.25 or 7.50%.

• BII's financing will contribute to development of 1.1 GW wind farm and 1.1 GW BEES project

British International Investment (BII) has signed agreements worth USD 300mn to support two flagship renewable energy projects in Egypt. BII's financing will contribute to the development of a 1.1 GW wind farm in the Gulf of Suez and Egypt's first fully integrated solar photovoltaic and battery storage system (BESS), also with a 1.1 GW capacity. Under Egypt's energy transition plan, the country aims to install 10 GW of renewable energy capacity and phase out 5 GW of fossil-fuel-based power by 2028, at an investment estimated at USD 10bn. Egypt has already attracted USD 4 bn in concessional financing for 4.2 GW of new renewable energy capacity since 2023.

Wind Farm in Gulf of Suez

The Gulf of Suez wind project is set to become Africa's largest onshore wind farm, with a total investment of USD 1.2bn. It also plays a key role in Egypt's Nexus of Water, Food, and Energy program. Beyond environmental benefits, its development is projected to create more than 10,000 direct and indirect jobs, fostering economic growth in the region. BII's contribution to this project includes USD 190mn, forming part of a broader USD 704mn debt financing package supported by a coalition of development finance institutions, such as the EBRD and AfDB.

Battery storage system

BII's financing also supports Egypt's first fully integrated solar photovoltaic and battery storage system. The project, which is expected to support Egypt's commitment to transitioning toward sustainable energy solutions, is again in collaboration with Scatec, EBRD, and AfDB. The project will require a total of USD 480mn - covering around 80% of its capital costs - and will deliver 1.1 GW of solar energy coupled with 200 MWh of battery storage capacity. To support the financial viability of this pioneering BESS project, BII is providing a USD 100mn concessional loan and a USD 15mn grant.

Egypt condemns Israeli Minister's statements over occupied West Bank annexation (Ahram)

Egyptian Automotive & Trading Company launches the New Third-Generation Audi A5 in Egypt (Ahram)

BII commits over USD 300mn to Egypt's renewable energy projects (Ahram)

IMF Program for Egypt: Fifth, Sixth Reviews May Be Merged (Sada Elbalad)

Egypt Hikes Cigarette Prices as New VAT Law Takes Effect (Sada Elbalad)

Egypt, Ukraine presidents discuss Iran-Israel crisis, Gaza ceasefire efforts (Egypt Today)

Suez Canal navigation uninterrupted despite ADMARINE12 rig incident (Egypt Today)

Egypt & Oman deepen economic ties with new 7 agreements (Egypt Today)

• Sales growth slows
• Regional tensions adversely affect tourism

The Dubai Purchasing Managers' Index (PMI) fell to 51.8 in June from 52.9 in May, according to S&P Global. The Dubai PMI thus dropped to its lowest level in nearly four years in June, driven by a marked slowdown in sales growth.

Data Download

Non-oil private sector companies reported only a small increase in new order volumes in June, the weakest in 45 consecutive months of growth. Many companies noted that competitive pressures and weaker tourism due to heightened regional tensions had negatively affected overall levels of new work.

Nevertheless, business activity rose sharply in June, with the pace of expansion matching that seen in May. Workforce numbers increased for the third consecutive month, albeit only slightly.

• New order growth slows to 45-month low
• Employment growth increases slightly

The seasonally adjusted S&P Global UAE Purchasing Managers' Index (PMI) rose to 53.5 in June from 53.3 in May. The slight improvement masked diverging trends among the index's sub-components, as a softening of new business growth was offset by a quicker expansion in output and a stabilisation of inventories.

Data Download

While non-oil businesses posted a rise in their new order intakes, the rate of growth eased and was the weakest since September 2021. Concerns about increasing regional tensions due to the conflict between Israel and Iran dampened client demand.

However, despite sales growth softening, UAE non-oil companies increased their output to a greater extent than in May, In fact, the gap in expansion rates between activity and sales widened sharply, which firms partly attributed to efforts to address long-standing capacity pressures.

Separately, employment increased modestly in June. Although the pace of growth slipped to a three-month low, it remained stronger than the trend observed in the first quarter.

Now let's look ahead. The level of confidence about the next 12 months increased to the strongest since November 2024. Non-oil companies said that projected sales growth and an easing of geopolitical tensions were the main drivers of positivity, according to S&P Global.

• That is an increase of 39% from March

Hotels in Abu Dhabi generated revenues of AED 847mn (USD 231mn) in April, according to the UAE's official news agency. That is an increase of 39% from AED 611mn (USD 166mn) in March.

A total of 172 hotels were in operation during the month, offering 34,383 hotel rooms. The total number of guest nights exceeded 1.52mn, with an average occupancy rate of 87%. The average revenue per available room reached AED 614 (USD 167).

Guests from non-Arab Asian countries topped the list with 149,000 hotel guests, followed by European visitors with 148,000, and UAE nationals with 97,000.

By category, five-star hotels received the highest number of guests with 265,000, led by 95,000 European visitors. Four-star hotels hosted 143,000 guests, while hotels rated three stars or below received 63,000 guests. Additionally, 61,000 guests stayed in hotel apartments.

• IMF said government should NGN 700nn monthly in fuel subsidy savings withheld by NNPC
• Failure to recover subsidy savings may force government spending cuts
• NNPC fulfilled all cash-call obligations to joint ventures between May and June 2025

The IMF has urged the Nigerian federal government to fully recover fuel subsidy savings currently withheld by the Nigerian National Petroleum Company Limited (NNPC) to sustain economic reform momentum and protect fiscal stability. In its 2025 Article IV consultation report, the IMF estimated these savings at about NGN 700bn per month, equivalent to roughly two percent of Nigeria's GDP annually. The Fund stated that redirecting these funds to the government's coffers is essential for maintaining a neutral fiscal stance and financing critical development projects.

Although Nigeria officially ended the fuel subsidy in 2023, the expected savings have not fully appeared in the federal budget due to a lack of transparency in the NNPC's oil revenue remittances. The IMF warned that if the government does not realize these subsidy savings starting in the second half of 2025, it will have to make tough budget adjustments elsewhere, particularly by cutting expenditure by about 0.6% of GDP.

Meanwhile, the NNPC reported that it has successfully met its cash-call obligations to joint venture operations and achieved 100% crude oil pipeline availability between May and June 2025. Group chief executive officer of the NNPC, Bayo Ojulari, announced this achievement during his keynote address at the 24th NOG Energy Week in Abuja. Ojulari said key pipelines such as the Trans-Niger, Trans Escravos and Trans Forcados all maintained full operational capacity during this period. Looking ahead, Ojulari outlined ambitious goals for the company, including increasing oil and gas sector investments from USD 17bn in 2024 to USD30bn by 2027 and USD 60bn by 2030. The NNPC aims to raise crude oil production to 2mn barrels per day by 2027 and 3mn barrels per day by 2030.

Nigeria must review 2025 budget to avert crisis, IMF warns (Punch)

MAN, marketers rally for refineries privatisation as $3bn repairs falter (Punch)

Oil producers get boost as NNPC clears legacy debts (Punch)

Nigeria to end gas flaring by 2030 under new strategy - NUPRC (Punch)

IMF: FG Needs to Rework 2025 Budget to Accommodate Lower Oil Prices (ThisDay)

Shettima: Private Investors Ready To Commit $60m To Upgrade Onne To Nation's First Green Port (ThisDay)

US-Africa Summit Prepares Nigeria For $2.1trn Consumer Spending Boom (ThisDay)

FG signs technical manpower deal with Saint Lucia, deploys experts to Caribbean countries (Nairametrics)

World Bank disburses N3.8 billion to boost climate adaptation in Yobe communities (Nairametrics)

IMF backs CBN's tight monetary policy to curb inflation (Nairametrics)

• Article IV report recommends revisiting the budget to reflect a less favourable oil price outlook
• IMF warns the fiscal deficit could widen from 4.1% to around 4.7%
• 2025 GDP growth forecast is raised to 3.4%, up from 3% projection in April
• IMF flags rising poverty and food insecurity, and calls for increased investment in infrastructure

The IMF published Nigeria's 2025 Article IV report on Wednesday (July 2), after consultations with Nigerian authorities on April 2-15. In the report, the IMF urges the government to revisit its proposed 2025 budget of NGN 54.99tn, warning that the current budget assumptions could widen the fiscal deficit from 4.1% to approximately 4.7%. This would increase Nigeria's debt burden and expose it to external shocks. Despite these concerns, the IMF raised Nigeria's 2025 GDP growth forecast to 3.4%, higher than the 3% estimate issued in the April World Economic Outlook update. Medium-term growth is expected to average around 3.5%. The higher forecast is underpinned by rising oil production and easing inflation.

The IMF also attributed the improved outlook to key reforms over the past two years, including the removal of fuel subsidies, stopping of monetary financing of fiscal deficits, and implementation of measures to stabilise the foreign exchange market. The Fund said these actions have boosted investor confidence, allowing Nigeria to access the Eurobond market and attract renewed portfolio inflows. However, the IMF urged Nigeria to implement a robust foreign exchange intervention framework to help reduce excess volatility in the FX market, describing the exchange rate as a key shock absorber.

Recent tax reforms aimed at boosting revenue mobilisation and ensuring debt sustainability were welcomed in the report. Nigeria's fiscal performance improved in 2024, supported by naira depreciation, stronger revenue administration and increased grant inflows which helped offset rising interest and overhead costs. The CBN was commended for maintaining a tight monetary policy stance to curb inflation. Efforts to recapitalise the banking sector and promote broader financial inclusion were also acknowledged.

Despite some positive economic gains, the IMF noted a rise in poverty and food insecurity. The Fund also cautioned that growth remains too low on a per capita basis. Downside risks from global uncertainty that were noted in the Article IV report include potential declines in oil prices or rising financing costs which could negatively impact growth, fiscal and external positions, and financial stability. To sustain reform momentum and boost Nigeria's growth potential, the IMF recommended stronger investment in electricity, agriculture, education, health and climate resilience, alongside efforts to reduce bureaucracy.

• Reserve decline in 2025 is attributed to demand side pressures
• Total decline in 2025 stands at USD 3.67bn from Dec's USD 40.88bn
• CBN plans reserve diversification to reduce dollar reliance and stabilise naira

The gross external reserves of the central bank (CBN) declined by USD 1.24bn or 3.2% m/m to USD 37.2bn as of end-June, after rising by 1.4% m/m the month before, according to CBN data. This year, reserves are down by a total of NGN 3.67bn, from USD 40.88bn at the end of December 2024. Reserves declined by USD 293.87mn in the last week of June alone, leading analysts to warn that modest FX inflows and falling oil revenues could leave the market vulnerable to demand-side pressures. While portfolio inflows and improved non-oil FX supply may support the naira in the near term, the overall market remains sensitive. The drop in reserves could tighten liquidity in the FX market and ultimately worsen inflation and borrowing costs.

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Despite falling reserves, the naira strengthened in June. At the official market, it appreciated to USD/NGN 1,536 (USD/NGN 1,586 end-May), while in the parallel market it firmed to USD/NGN 1,567 (USD/NGN 1,625 end-May). The CBN's broader FX strategy includes promoting backward integration and partnering with corporates like Airtel Africa to attract long-term capital. Still, financial analysts caution that structural challenges such as debt service obligations, speculative activity and low FX supply continue to weigh on the currency and limit the pace of reserve recovery. In June, CBN governor Olayemi Cardoso announced plans to diversify Nigeria's external reserves to strengthen the foreign exchange market, reducing reliance on the US dollar by including other currencies, gold and SDRs. More details on this are expected from the CBN soon.

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• PM Modi on a five-nation tour
• PTA includes tariffs concessions on 450 products

India will seek to expand its preferential trade agreement (PTA) with Mercosur during Prime Minister Narendra Modi's visit to Brazil and Argentina this week, as part of his five-nation tour from July 2-9, as reported by Business Standard citing unknown government sources. The PTA, originally signed in 2004 and operational since 2009, currently includes tariff concessions on around 450 product lines from each side, covering a narrow set of goods.

India aims to deepen trade ties with Mercosur-comprising Brazil, Argentina, Uruguay and Paraguay-by broadening the scope of concessions and pushing for greater market access. However, a lack of internal consensus within the bloc has delayed progress. This issue is expected to be raised in Modi's bilateral meetings with Brazilian President Luiz Inácio Lula da Silva and Argentine President Javier Milei on the sidelines of the BRICS Summit in Brazil.

India's exports to Mercosur totalled USD 8.12 bn in FY25, while imports stood at USD 9.36 bn, with Brazil accounting for the bulk of this trade. India's current offer list includes leather, chemicals, cotton yarn, and meat products, while Mercosur provides access to pharmaceuticals, essential oils, plastics, and machinery.

To provide context, India's push to expand the PTA comes amid a broader effort to diversify trade partnerships and secure markets in emerging economies. Enhanced access to Mercosur could provide Indian exporters a valuable hedge against tariff risks in Western markets and support outbound shipments from manufacturing hubs like Gujarat and Maharashtra.

• Business confidence remains positive but muted from before
• Composite PMI rose to 61
• Services growth driven by new orders and increased output

India's services sector ended Q1 FY26 on a strong note, with robust gains in output, new orders and employment, according to the HSBC India Services PMI. The Business Activity Index rose to 60.4 in June, from 58.8 in May, its highest level in ten months, driven by sustained domestic demand and a marked rise in export orders-particularly from Asia, the Middle East, and the US. Although export growth moderated slightly from May, it remained one of the strongest since the metric was introduced in 2014.

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Growth remained broad-based, with Finance & Insurance continuing to lead, while Real Estate & Business Services lagged. Employment expanded for the 37th straight month, albeit at a slower pace, still outperforming the long-run average. Capacity pressures also picked up marginally, suggesting momentum in service delivery.

Input cost inflation moderated to a ten-month low, although salaries and wage-related pressures persisted. Despite this, service providers managed to pass on costs, with output price inflation-though lower than May-still exceeding historical norms. Consumer Services faced the steepest cost pressures, while Finance & Insurance led output price increases.

Confidence in future output remained positive but softened, with only 18% of firms expecting higher activity a year ahead-its lowest since mid-2022.

On a broader scale, the HSBC India Composite PMI rose to 61.0 in June, indicating the fastest pace of private sector expansion in 14 months. Growth in both manufacturing and services was supported by strong domestic and international demand, although employment growth slowed slightly due to a deceleration in services hiring. Cost and charge inflation eased across both sectors.

The services sector's strong Q1 finish signals a healthy start to FY2026, with domestic demand as the primary engine. Softer inflation and sustained job creation offer further room for policy support if needed, though weakening business confidence bears watching as a potential early sign of global uncertainty transmission, in our view.

US, India push for trade deal after Trump strikes deal with Vietnam (Business Standard)

India to pitch for preferential trade pact expansion with Mercosur nations (Business Standard)

Quad launches critical minerals push as PM eyes Latin America deals (Business Standard)

Indonesia seeks 'predictable policy' by India on palm oil imports (Financial Express)

India services sector growth hits 10-month high as demand surges, PMI shows (Economic Times)

India is an essential partner, we want fair and reciprocal trade: US State Department's Mingon Houston (Economic Times)

RBI pushes for real-time credit reporting to boost transparency and consumer experience (Economic Times)

Question:

What are the best indicators to track domestic credit on a high frequency basis?

Answer:

The Reserve Bank of India releases weekly commercial credit details (every Friday) as part of its Bulletin Weekly Statistical Supplement. The latest is available here. This covers bank credit, food credit and Non-food credit. Additionally, the RBI releases detailed commercial credit data once a month, titled Sectoral Deployment of Credit. The latest is available here.

The data are provisional. Bank credit, food credit, and non-food credit figures are based on the fortnightly Section 42 return, which covers all scheduled commercial banks (SCBs). Sectoral non-food credit data are sourced from the sector- and industry-wise bank credit (SIBC) return, which includes select banks representing approximately 95% of total non-food credit extended by all SCBs. This dataset reflects credit outstanding as of the last reporting Friday of each month and may not fully capture intra-month trends.

The question was asked in relation to the following story: Gross GST collection rises 6.2% y/y to INR 1.84tn in May

• Income tax relief measures and low inflation to support demand
• FMCG growth is pegged at lowest in a decade

Finance Minister Nirmala Sitharaman has affirmed that budget FY26's income tax relief measures are beginning to revive consumer sentiment, particularly in urban India. In an interview with Financial Express, she noted that the positive effects of the new tax regime-which offers full tax exemption to individuals earning up to INR 1.2mn and salaried earners up to INR 1.275mn -have started playing out since April. These changes, she said, are boosting confidence among a broad spectrum of citizens, including self-employed professionals and small business owners.

The remarks come against the backdrop of a decade-low 4.6% growth in FMCG giant ITC's consumer business in FY25. Sitharaman acknowledged the slowdown but attributed it more to structural factors such as quick-commerce discounting, rising input costs, and intensifying regional competition than a lack of household purchasing power. She remains optimistic that the tax reliefs, along with cooling inflation, will support a turnaround in consumer-driven sectors.

CPI inflation, now at a six-year low of 2.82% in May 2025, and urban inflation at 3.07%, has created a conducive environment for discretionary spending. The Finance Minister pointed to this easing price environment as an added support for a consumption rebound. NielsenIQ data also shows a shift in consumer preferences toward smaller packs, indicating cautious optimism in spending patterns.

With fiscal support from tax reliefs and inflation easing below the RBI's 4% target, the groundwork is being laid for a consumption-led recovery in urban India. Additionally, rate cuts by the RBI will also drive momentum, in our view. If sustained, this could restore growth momentum in sentiment-sensitive sectors such as FMCG, retail, and durables in the second half of FY26.

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• Largest target so far this year
• Increase was expected as govt set higher fiscal deficit target

The government set an IDR 252.0tn gross issuance target in Q3, according to the Treasury's website (DJPPR). This is higher than the IDR 208.0tn gross issuance in Q2, which exceeded the original target of IDR 190.0tn, and the Q1 issuance of IDR 222.2tn. Compared to a year ago, the government realised IDR 199.2tn gross borrowing in Q3 2024.

The government will hold five auctions in July and September and four auctions in August. The Treasury will continue to alternate between regular and Sukuk bond auctions every other week.

Overall, the increase in the gross borrowing target is expected, given that the government raised its fiscal deficit target as tax revenues lagged behind.

• Domestic tax revenues decline by 6.2% y/y on limited VAT rate hike implementation, dividend transfers to Danantara
• Spending reaches 38.9% of annual target
• Govt aims for 2.78% of GDP fiscal deficit, up from 2.53% originally

The state budget deficit widened to 0.81% of GDP in H1, up from 0.09% in Jan-May, FinMin Sri Mulyani Indrawati told the parliament's budgetary committee in a working meeting, the local media Bisnis reported. Domestic tax revenues fell 6.2% y/y, reaching only 38.3% of the annual target. The total revenues stood at IDR 1,210.1tn, or 40.3% of the annual target.

The FinMin attributed the revenue contraction to the limited implementation of the VAT rate hike in January. In addition, the declining Indonesian crude oil (ICP) prices all weighed on tax revenues. Furthermore, the government transferred some of the dividends from state-owned enterprises to the sovereign wealth fund Danantara, which led to further revenue contraction.

On the spending side, total expenditure reached IDR 1,407.1tn, or 38.9% of the target. Central government spending lagged further behind at 37.3% annual realisation, while regional transfers were slightly ahead at 43.5%.

The primary surplus fell to IDR 50.2tn, down from IDR 192.1tn in Jan-May. The total deficit expanded to IDR 197.0tn, up from IDR 21.0tn in Jan-May.

We remind that the FinMin admitted that the state budget deficit will likely miss the original target of 2.53% of GDP, as the government now targets 2.78% of GDP. Revenues will fall behind schedule, while the government will try to offset some of the revenue decline through spending cuts.

• Loans from multilateral lenders and Chinese and Middle Eastern banks help boost the reserves
• SBP exceeds its end-June 2024 target of USD 14bn

The State Bank of Pakistan's foreign exchange reserves rose to USD 14.51bn as of June 30, reflecting an increase of USD 5.45bn during the last ten days of the month, according to a statement from the central bank. The forex reserves had declined to USD 9.06bn at week ending June 20, down by USD 2.66bn w/w due to the repayment of external debt, particularly Chinese commercial loans.

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The rebound in reserves was anticipated, with the SBP expecting inflows of USD 3.1bn from commercial banks and USD 500mn from multilateral creditors. However, the sources of the remaining USD 1.85bn inflows have not been disclosed.

According to a Reuters report citing unnamed government officials, Pakistan secured loans worth USD 4.9bn last week, including USD 3.4bn in Chinese debt refinancing, USD 1bn from Middle Eastern commercial banks and USD 500mn from multilateral lenders. Some analysts also noted that the central bank may have also intervened aggressively in the interbank forex market to accumulate reserves.

Overall, the SBP exceeded its end-June forex reserves target of USD 14bn. As a result, import cover has improved, with reserves now sufficient to finance approximately 10 weeks' worth of goods and services imports. The IMF projects that the forex reserves will continue to rise, reaching USD 17.7bn by end-June 2026.

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• New orders fell due to subdued domestic demand, despite a rise in export sales
• Output rose marginally, prompting firms to cut staffing levels and reduce input purchases
• Input cost pressure intensified, leading firms to sharply raise their selling prices
• Business confidence remained positive but slipped to its lowest since May 2024

Pakistan Manufacturing PMI fell to 50.5 in June, from 51.1 in May, posting the lowest level since August last year, according to a survey conducted by S&P Global in collaboration with the country's largest bank, HBL. However, the print remained above the neutral mark of 50.0, signalling a marginal improvement in the sector's overall health.

New orders fell for the second straight month, though fractionally, as a rise in export sales - for the first time in three months - was offset by subdued domestic demand conditions. Some firms attributed the weakness to the recent flare-up in tensions between Pakistan and India. Despite the dip in new orders, output continued to expand, increasing for the fourteenth straight month. However, the pace of growth was marginal and the slowest in ten months.

Input cost pressures intensified in June, leading to a steep acceleration in input price inflation, driven in part by rising raw material prices and increased tax burdens on businesses. In response, manufacturers raised their selling prices solidly, with the rate of charge inflation hitting its highest level since August 2024. To manage cost pressures amid lower production requirements, firms cut staffing levels in June and reduced input purchases.

Business confidence weakened to the lowest level since the survey began in May last year as firms raised concerns about heightened geopolitical tensions, higher taxes, and a prolonged period of inflationary pressure. Nonetheless, optimism regarding the year-ahead outlook for output persisted, underpinned by hopes of business expansions, new product launches and easing price pressures.

Commenting on the recent PMI trends, Humaira Qamar, equities and research head at HBL, said that the data suggests the provisional official GDP growth estimate of 2.7% for FY25 is likely to face a downward revision.

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• DBCC raised fiscal deficit target to 5.5% of GDP
• Extra borrowing to be sourced from domestic market
• Govt still aims for 80-20 split between domestic and external funding

The government is looking to raise its borrowing programme to PHP 2.60tn this year, up from PHP 2.55tn previously, national treasurer Sharon P. Almanza told the local daily BusinessWorld in a message. This is in line with the higher fiscal deficit target as the Development Budget Coordination Committee (DBCC) raised the deficit ceiling to 5.5% of GDP last week, up from 5.3% targeted initially.

The extra borrowing (on top of the original target) will be sourced solely from the domestic market, the national treasurer said. The overall budget financing will be split 80-20 between domestic and foreign funding, Almanza confirmed.

So far, gross borrowing has reached PHP 1.33tn in Jan-May, down by 6.7% y/y. Domestic borrowing was down by 12.7% y/y to PHP 1.02tn, while foreign borrowing fell by 21.5% y/y to PHP 305.9bn.

• The central bank makes the third reduction in two years, aimed at encouraging economic activity while controlling inflation
• The governor noted ongoing risks from external factors like trade barriers and geopolitical tensions
• BoA expects inflation to return to target by early 2026

The Bank of Albania's (BoA) announced a 25.0bp policy rate cut, taking it to 2.50%. Governor Gent Sejko stated that the rate cut aims to encourage economic activity while maintaining control over inflation. This is the third reduction in the key rate over the past two years. In 2024, the bank shifted its monetary policy for the first time since Mar 2022, when it began tightening measures in response to rising inflation.

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BoA governor Sejko noted that while the economy is growing near its potential, there are risks related to increasing production costs and inflation. Tourism growth is expected to moderate, with inflation anticipated to return to target levels in the beginning of 2026. Sejko also reported that economic and financial conditions in the country have remained positive during H1 2025, with steady economic growth, low consumer price inflation, and stable financial markets. Despite these positive trends, the governor acknowledged ongoing challenges from the external environment, including rising trade barriers and geopolitical tensions, which could impact the domestic economy. The Supervisory Council decided to ease the monetary policy stance to foster better conditions for achieving price stability. Consumer price inflation averaged 2.3% during April and May, influenced by higher food and rent prices, while other prices remained stable. Inflation continues to be below target due to weak external pressures, including low imported inflation rates.

According to Instat data, economic activity grew by 3.4% in Q1 2025, driven by increased consumption, investment, and foreign demand. However, the industrial and agricultural sectors showed contraction. Sejko highlighted improvements in the labour market, with non-agricultural employment rising and the unemployment rate decreasing to 8.7%. Wage growth accelerated to 9.6% in Q1, indicating rising household income but also posing risks for production costs and inflation. Factors supporting economic growth include stable financial balances in the private sector, a supportive financial environment, and increased interest in Albania as a tourist and investment destination. The private sector loan portfolio grew by approximately 16.2% in the first five months of the year, with a low non-performing loan ratio of around 4.1%.

The updated forecasts suggest continued economic growth close to potential, driven by domestic demand and a stable labor market, Sejko added. He also mentioned that the balance of risks to inflation remains symmetric, with geopolitical tensions and trade wars posing potential upward risks, while declining inflation in the eurozone presents downside risks. The governor emphasised that low levels of foreign and non-core inflation may lead to lower inflation levels than previously expected in the near term.

• This is part of a much broader attack of Pashinyan on the Church who has remained as the only authoritative power in the country

Armenian Prime Minister Nikol Pashinyan has called for holding a snap election of the Catholicos of all Armenians in a post in social networks.

Tensions between the Armenian Apostolic Church and the Armenian government grew after Pashinyan took the office and declared Karabakh's belonging to Azerbaijan. Catholicos of All Armenians Karekin II said earlier that the Armenian Apostolic Church still wanted Pashinyan to resign. Since late May, Pashinyan has been strongly criticizing Karekin II and archbishops, and demanding that the Catholicos be dethroned due to information about the violation of the vow of celibacy.

Two archbishops of the Armenian Apostolic Church have been arrested in Yerevan since late June. The head of the Shirak Diocese, Archbishop Mikael Ajapakhyan, is accused of calls for seizing power, while the leader the Sacred Struggle protest movement, Archbishop Bagrat Galstanyan, is accused of planning terrorist acts and seizure of power in Armenia. Fifteen persons have been arrested besides the archbishops.

In 2024, Archbishop Galstanyan announced protests in Yerevan against the Armenian government's policy in the delimitation of borders with Azerbaijan with the blessing of Catholicos of all Armenians Karekin II.

• CPI falls from 4.3% y/y in May
• Food inflation provides main impetus to headline CPI
• Services also adds to headline inflation

Inflation moderated slightly to 3.9% y/y in Jun from 4.3% y/y in May. The headline CPI was hovering around zero for the whole of 2023 and this momentum carried over to the first four month of 2024, but base effects finally kicked in the latter part of the year. Price growth has generally continued to inch up so far 2025 as headline inflation is now running above the 3.0% CPI target. Food inflation, which has the largest weight in the CPI basket of 41.3%, was firmly in deflation territory until mid-2024, before picking up speed in later months. It did decrease from 7.2% y/y in May to 6.2% y/y in Jun against its current longer-term rising trajectory. Non-food inflation fell by 0.2% y/y. Clothes, shoes, household items and household appliances were the key items driving the non-food deflation. Services inflation edged up from 3.1% y/y in May to 3.5% y/y in Jun.

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Food and services inflation have thus added 2.6% and 1.4% to headline inflation, respectively. Nonfood has subtracted 0.1% from the CPI.

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Central bank's current forecast, published in its latest inflation report from 17th of Jun, sees average 2025 inflation at 3.0-3.1% vs the 3.0% CPI target.

• Yerevan claims existence of quality violations
• It is unclear whether this relates to recent tensions between the two countries

The manufacturer of the "Korovka iz Korenovka" ice cream (part of the Renna Group) has not received official conclusions from Armenia regarding the batch of ice cream, which, according to the country's inspection bodies, did not comply with the Customs Union standards for the content of E. coli bacteria.

Armenia has temporarily banned the import of a batch of popsicles produced by the Russian company "Fabrika iznogo morozhenogo" LLC. According to the Armenian Food Safety Inspectorate, due to the non-compliance of the batch with the standards established by the technical regulations of the Customs Union for the content of E. coli bacteria, an order was issued to ban its sale, recall it from the market, destroy it or dispose of it.

It was specified that the ban applies to batches imported after July 2, 2025 and does not apply to products imported before this date.

"Fabrika iznogo morozhenogo" is one of the leading ice cream manufacturers in Russia, the enterprise is located in the Krasnodar Territory. In 2024, the ice cream production at the plant exceeded 55 thousand tons.

It is not clear whether there might be any connection between the ban and the recent arrest of the Russian-Armenian businessman and owner of ENA Samvel Karapetyan.

• Tensions in bilateral relations have been growing since the downing of an Azerbaijan Airlines aircraft in Russian airspace late last year
  

Today, Ambassador Extraordinary and Plenipotentiary of the Russian Federation to the Republic of Azerbaijan Mikhail Yevdokimov was summoned to the Ministry of Foreign Affairs. It was stated that during the meeting with Deputy Minister of Foreign Affairs of Azerbaijan Araz Azimov, Azerbaijan expressed its protest over Russia's unfriendly actions and steps that undermine bilateral relations between the two countries.

Azerbaijan once again conveyed its deep concern over the events of June 27, when raids carried out by Russian law enforcement on homes of Azerbaijanis in the city of Yekaterinburg resulted in the deaths of two Azerbaijani citizens and serious injuries to several others due to unlawful conduct. Azerbaijan underscored that it expects a thorough and objective investigation by Russia into the violations committed by its law enforcement agencies and for those responsible to be held accountable.

The Azerbaijani side also rejected Russia's objections regarding recent measures taken with respect to the Sputnik Azerbaijan office, stating that all actions were carried out in full compliance with Azerbaijani legislation and that an official investigation is currently underway.

The statement went on to recall that tensions in bilateral relations have been growing since the downing of an Azerbaijan Airlines aircraft in Russian airspace late last year.

• President denies existence of political prisoners, calls them bad people and beasts
• Lukashenko claims recent pardons politically motivated
• Belarusian leader also says US does not really want to stop war in Ukraine

President Lukashenko has pardoned 16 additional political prisoners ahead of this week's national holiday. Names have not been released yet, but an official publication says most have health problems or young children. We note that Lukashenko delivered a speech related to the holiday, in which he reiterated claims that there are no political prisoners in Belarus. He said he also conveyed this to US President Trump's Ukraine envoy Keith Kellogg during the latter's recent visit to Belarus.

Overall, Lukashenko insisted that the people serving sentences for so-called extremist crimes are 'bad' and called them 'beasts'. He stated his decision to pardon some of them was politically motivated, claiming that the regime would have suffered if any of the prisoners had died in jail. His comments indicated possible disapproval of the recent prisoner release brokered by the US, particularly in law enforcement circles.

With regard to the US, Lukashenko said he warned Kellogg that any interference on Belarusian territory would trigger a lightning-fast response with the weapon Washington is most fearful of. This referenced the nukes Belarus claims to have. At the same time, the Belarusian president noted Oreshnik missiles will be provided by Russia this year, allowing Belarus to reply with non-nuclear strikes. He also suggested the US does not really want to stop the war in Ukraine, which is more critical compared to his evaluations of the Trump administration's early efforts.

• Gold reserves slightly higher, main upward push comes from bank's foreign exchange assets
• Reserves at record-high levels, comfortably above year-end benchmark

The central bank's forex and gold reserves exceeded USD 11.5bn in June after USD 11.1bn in May, according to an official publication. The impact of gold prices was less pronounced over the month, with gold reserves only rising by USD 19.4mn m/m. The decisive upward push came from the bank's foreign exchange assets and amounted to USD 338.3mn m/m. We remind that households were net FX sellers in May, so the NBRB may have made further purchases to expand its assets if the trend persisted.

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Overall, the bank's foreign exchange holdings reached USD 1.42bn, while gold reserves posted USD 5.7bn. As a whole, reserve levels remain at record-high levels and comfortably above the USD 7.1bn benchmark for end-2025. They are mostly elevated by the favourable gold price dynamics throughout the year. Russia's willingness to delay debt repayment has also eased pressures, but could consequences in the medium- and long term.

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• Finance minister justifies serious budget revenue shortfall compared to budget law with delayed adoption of law
• Petkova accuses former finance minister Asen Vasilev for increased costs on social payments, pensions, wages, subsidies, saying that current cabinet cannot cancel those anymore

The finance ministry's new revenue collection measures will be efficient in H2, as they were implemented only as of May 1, finance minister Temenuzhka Petkova said in front of journalists. Petkova answered criticisms about budget revenue shortfall in Jan-May, arguing that the implemented measures cannot produce results in only one month. The latest figures showed that the budget revenues were up by only BGN 3.3bn y/y in Jan-May, while the government had set a goal for a BGN 18bn increase in budget revenues in 2025. The VAT revenue growth was almost 15% in Jan-May, significantly lower compared to the planned 34% increase in the budget law.

Petkova accused former finance minister and opposition WCC leader Asen Vasilev about the high expenditure, in particular in the social sector, i.e. social payments, pensions, personnel costs, capital expenditures and subsidies. The current expenditures have been legally regulated due to Vasilev's legislative initiatives from 2022, 2023 and 2024, and the government cannot cancel those costs, Petkova said. She still expressed determination to stabilise the public finances and overcome the consequences from previous governments' decisions, but did not really outline more concrete plans and measures that will be considered.

We note that earlier in February, when the new 2025 budget bill was discussed, ruling GERB key politicians admitted they could not risk to cancel previously allocated and promised social privileges and wage hikes for the public sector employees and pensioners, due to the fragile political situation in the country. They also indicated plans to cover the rising deficit with higher new debt (set to reach record high BGN 18.9bn in 2025), instead of adopting fiscal consolidation measures. The government announced plans for increases in the social security contributions as of 2027 and 2028 as a way to partially address the rising weight of public wages and pensions, but we think that more unpopular actions will be unavoidable in the years to come.

• Government says that due tranches under RRF have been reduced from nine to five
• There is no mention which investments are cut from plan
• Bulgaria to access additional EUR 479mn from EC under REPowerEU chapter to finance measures in support of energy market liberalisation and against energy poverty

The EC approved Bulgaria's amendments to the recovery plan and the plans and reforms included in the REPowerEU chapter, the government announced on its website. The re-negotiation of the plan under the Recovery and Resilience Facility (RRF) was among the most important priorities for the cabinet and it expected that the approved amendments will unblock the plan implementation and secure the conditions for its successful completion. The amendments envisaged a significant simplification of the requirements for the execution of the stages and objectives in the reforms and investments, the cancellation of the so-called intermediate goals and merger of the stages. The total number of stages and objectives was reduced from 321 to 259, while the number of tranches with RRF funds - from nine to five.

The government did not name in particular what kind of investments were left out of the plan but said that these were impossible for realisation within the Aug 2026 deadline. The government had replaced some of them with new investments in energy efficiency and transport connectivity, it said. We recall that Bulgaria was allocated access to EUR 5.7bn of grants under the RRF in total and has received only EUR 1.37bn out of them so far. However, the approval of the REPowerEU chapter content will enable Bulgaria to absorb the additional EUR 479mn resource from the EC to support measures against energy poverty, measures in support of the electricity market liberalisation and the storage and usage of renewable energy, among other goals. The plan remained focused on the green transition targets, as 49% of the funds will be directed for climate measures and 20.6% for the digital transition, the cabinet highlighted. The EU Council will have four weeks to review and approve the EC's assessment of Bulgaria's amended plan.

• Achieved yield to maturity is 3.16%, coupon - 3%
• Bids amounted to EUR 2.378bn, proceeds from sale to used for refinancing existing liabilities, finance budget deficit

The government on Wednesday successfully sold EUR 1bn in 10-year government bonds maturing in 2035, at a yield of 3.16% and an annual interest rate of 3%, according to a press release. Institutional investors bid EUR 2.38bn. The ministry pointed that the issuance conditions and the strong investor interest once again confirmed Croatia's strong status as an attractive issuer in the domestic capital market. The net proceeds from the bond issuance will be used for refinancing existing obligations and financing budget expenditures. Lead managers for the issuance were Erste & Steiermarkische Bank, Croatian Postal Bank (HPB), OTP Bank, Privredna Banka Zagreb, Raiffeisenbank Austria, and Zagrebacka Banka. The bond will be registered with the Central Depository & Clearing Company on Jul 4 and is expected to be listed on the Official Market of the Zagreb Stock Exchange by Jul 7.

The finance ministry's T-bills issuance calendar shows plans for three more issues until the end of the year, 3-month papers in September and December, as well as 1-year T-bills in November. The bond issuance plan stipulates that EUR 4bn in domestic government bonds are to be issued this year (2- and 5-year government bonds were issued in March; and in Q3), while EUR 2bn in 15-year Eurobond was issued in February. Note that according to the finance ministry's data, on Mar 3, a 5-year 0.25%-coupon domestic government bond worth HRK 5bn (EUR 663mn) matured, on Mar 8 - EUR 1.85bn in 2-year 3.65%-coupon domestic government bond was due (of which EUR 1.34bn in retail bonds) and on Mar 11, EUR 1.5bn in 10-year 3%-coupon Eurobond matured. Furthermore, on Jul 9, HRK 6bn (EUR 796mn) in 10-year 4.50%-coupon domestic government bond matures. Note also that in just over two years, the government made fifteenth issues of government securities that citizens were able to purchase, 12 of which were T-bills. Citizens currently hold more than 7.5% of the public debt, with more than 290,000 investors having subscribed to securities worth more than EUR 8.9bn, meaning that the sale of retail government securities has resulted in the payment of more than EUR 308mn in interest to citizens.

[Homeland Movement head] Penava's commission for the victims of Bleiburg (Vecernji List)

Croatia loses arbitration with French bank: EUR 17.55mn must be compensated (Vecernji List)

Retirees' work is patching up a bad system (Poslovni Dnevnik)

From accommodation, cafes, to VAT - a record 'harvest' is coming (Poslovni Dnevnik)

Why do tourists spend EUR 170 here, and EUR 250 in Italy and Spain? (Poslovni Dnevnik)

Croatia places 10-year bond worth EUR 1bn on the domestic market (Jutarnji List)

Croatia's 12 years in the EU: The numbers are clear, look how much richer a country we are today compared to Jul 1, 2013 (Jutarnji List)

Why would Penava lead a commission for communist crimes? There's much less work to do there than to lead an office for Ustasha crimes (Slobodna Dalmacija)

PM Plenkovic criticises President Milanovic: I don't know by what logic there should be understanding towards Putin; it's a shame for the Croatian political scene (Novi List)

Oil prices rise towards USD 68, OPEC+ in focus (Novi List)

Croatia places 10-year bond worth EUR 1bn on the domestic market (Novi List)

• Premier points Croatia is not only Mediterranean destination with sea and beaches
• Plenkovic denies link existing between wage growth, especially in the public sector, and inflation
• Tourist arrivals, overnights increase by 4% y/y in H1, according to HTZ data

PM Andrej Plenkovic on Wednesday commented on the inflation acceleration in June, once again calling on all market participants to set prices reasonably, noting that Croatia is not the only Mediterranean destination with sea and beaches. He recalled multiple appeals and numerous meetings with all relevant stakeholders from hospitality, catering, food industry, and retail sectors, who were warned about price policies. Plenkovic underlined that Croatia was no longer a command economy or a one-party system where the government sets hotel room prices, restaurant menu prices, or prices of cafe drinks. The premier highlighted that a significant share of European tourists choose their summer destination based on prices, so everyone should be reasonable and make decisions on service prices in a way that ensures visitors return next year. According to Plenkovic, the season is encouraging, but the effects of the season should not have negative repercussions on domestic people, who also have to shop and manage their finances. At the same time, Plenkovic denied link existing between wage growth, especially in the public sector, and inflation.

On a related note, the eVisitor system of the Croatian Tourism Board HTZ showed there were 7.5mn arrivals and 29.2mn overnight stays in H1, up by 4% y/y, according to a press release. Of these, 27mn overnight stays were recorded on the Adriatic, which is 4% y/y more. In terms of markets, the most overnight stays in H1 were achieved by tourists from Germany (5.8mn, up by 2% y/y), Croatia (4mn, up by 11% y/y), Slovenia (2.8mn, up by 5% y/y) and Austria (2.7mn, up by 4% y/y). In June alone, there were 3.3mn arrivals and 16.2mn overnight stays, which represents 9% y/y increase in arrivals and 12% y/y growth in overnight stays - the most overnight stays were recorded by tourists from Germany market (4mn, up by 48% y/y), Croatia (1.6mn, up by 11% y/y), Slovenia (1.5mn, up by 11% y/y) and Austria (1.5mn, up by 11% y/y).

According to stats office data, in January-April, foreign tourists realised 1.5mn arrivals and 4.25mn nights, which is 2.4% and 5.2% expansion, respectively, while domestic tourists' arrivals and nights increased by 6.4% and 3.2%, correspondingly. Altogether, arrivals and nights increased by 3.6% and 4.7% in the first four months of the year. The stats office is to publish data for May on Jul 8. If tourism providers continue to set excessively high prices, we may expect the tourism season this year to be weaker as Croatia's tourism product is already losing ground in terms of price competitiveness compared to the Mediterranean countries.

• Commission to bring Croats' remains back to Croatia, to be formed already next week
• Penava to remain deputy Parliament's Speaker, PM Plenkovic says

Homeland Movement (DP) leader Ivan Penava will not be joining the government but remain a deputy parliament speaker and chair a commission focused on post-WWII victims, while the government will continue to include three DP ministers, PM Andrej Plenkovic said on Wednesday. Regarding the commission that Penava will lead, Plenkovic said it will deal more intensively with the locations, identification, and relocation of the remains of victims from the post-WWII period, including those from Bleiburg and other so-called death marches. It will deal with what remains a collective responsibility for the society, he said, adding that he particularly values the efforts made over the past years by the Ministry of War Veterans, led by Minister Tomo Medved. The commission will not have its own budget or staff. Instead, it will be supported administratively by the Government Secretariat, while operational matters will remain under the jurisdiction of the relevant department within the Veterans Ministry, Plenkovic said.

Nikola Grmoja of the opposition Most party believes the commission is a political role created for Penava. He claims the HDZ opposed increasing the Homeland Movement's positions in the government since the party now has fewer MPs than when the coalition was formed. Igor Peternel (DOMiNO) criticised the commission as a "toy given to Penava" because he did not enter the government; he also called Penava irresponsible, pointing out that Penava recently spoke about communist crimes but then voted against establishing a remembrance day for victims of communism. Marijana Puljak (Centre) noted that Penava, once seen as a great saviour and watchdog against the HDZ's corruption and clientelism, is now reduced to waiting for crumbs from PM Plenkovic, adding that this was another step toward the HDZ assimilating and neutralising the Homeland Movement.

• Labor demand falls by 7.3% y/y in H1, falls by 1.6% q/q in Q2
• Highest demand for workers reported for salespersons, waiters, cooks, drivers, warehouse workers
• Labour market performance to remain overall stable in next months - certain worsening likely due to likely easing economic activity, preparations for high season to play opposite effect
• EIZ data suggest slower than previously expected economic activity in Q2

The labour demand dropped further in June as the Online Vacancy Index (OVI) of the Institute of Economics, Zagreb (EIZ) decreased by 8.1% y/y in the month, the fall easing from 13.4% y/y drop in May, according to a press release. Still, the seasonally-adjusted data point to a 6.2% m/m increase of the index in June, which is the largest monthly growth rate since May 2022. Cumulatively, in January-June, the demand for labour decreased by 7.3% y/y, while in Q2 - by 1.6% q/q as the seasonally adjusted values in April and May were negative. EIZ pointed out that although these data indicate a further drop in demand in Q2 as well, it is somewhat smaller than in Q1, when it was 5.6%.

The five most sought-after occupations in June were unchanged y/y and were salesperson, cook and waiter, which switched places, while warehouse worker and driver took fourth and fifth place. The biggest positive contribution to the increase in June came from job advertisements for civil engineers and construction workers, while the biggest negative contribution came from advertisements for salespersons, warehouse workers, waiters, and hotel/hospitality staff, whose demand collectively fell by 19% y/y.

The registered unemployment rate is estimated to have decreased by 0.5pps m/m to 4.1% at end-May (final data by the stats office are due on Jul 21). Given EIZ comments and data, we think that the labour market performance in the next months might not be as positive as previously expected, despite the already starting high season in tourism. As European economies remain weak, geopolitical tensions are deepening, while global gas prices increase has resumed and protectionism in international trade is to increase, we expect the economic expansion this year to be slower than previously expected, hence the labour market data to be more subdued.

• CPI increases from 3.5% y/y in May
• Food grows by 10.1% y/y and contributes 3.5% to headline inflation
• Headline inflation is running above 3.0% CPI target

Headline inflation was well-contained during the whole of 2024 due to favorable base, moderating global food and energy prices, and restrictive monetary policy. These factors ensured that price growth also remained consistently below the CPI target of 3.0%. However, 2025 has brought about a faster pace of price growth, which reached 4.0% in Jun vs 3.5% y/y in May.

Data Download

Food was in deflation territory for some months in 2024 and only reared its head towards the end of the year. It has now came to 10.1% y/y in Jun from 8.3% y/y in May. Given that it accounts for 34.5 percent of the CPI basket (food weight was 33.4% in 2024), it has added 3.5% to Jun inflation. Apart from food, health inflation also rose strongly by 9.4% y/y and contributed 0.7% to headline inflation. Services inflation was also robust at 6.7% y/y in Jun and contributed 0.3% to the CPI. Deflation was registered in communication, transportation and household equipment.

The NBG argued at its last policy meeting that inflation will temporarily exceed the target in 2025, averaging 3.8%, but stabilize around 3% in the medium term.

• Parliament increases fines for four four administrative offenses

Individuals who fail to pay fines for four administrative offenses - petty hooliganism, disobeying police, insulting public officials, and violating protest rules such as blocking roads or wearing face coverings - will be sent to detention if they repeat the offenses. The rule changes are part of amendments to Georgia's Code of Administrative Offenses, passed by the Georgian Dream parliament on July 2, following two days of accelerated deliberations during extraordinary sessions.

Fines for these offenses vary and increase with repeated violations, but generally range around GEL 5,000 (about USD 1,800). If an individual fails to pay a previous fine and is found guilty of the same offense again, the court will no longer have the option to impose another fine and will be required to order detention.

The fine for road blockage was GEL 500 before December, until the Parliament increased it tenfold to GEL 5,000 (about USD 1,800), more than twice the average monthly income in Georgia.

• Giorgi Gakharia's political union - unlike other opposition parties - did not withdraw its party list

Members of the parliamentary faction of the "Gakharia for Georgia" party have had their parliamentary powers officially terminated. The decision was made by the single-party legislative body on the grounds of non-equivalent absences from the deputies' sessions.

We are talking about 12 MPs whose mandate was terminated: Giorgi Gakharia, Teona Akubardia, Ana Buchukuri, Levan Gogichaishvili, Zaza Tavadze, Beka Liluashvili, Natia Mezvrishvili, Berdia Sichinava, Kakha Kemoklidze, Roin Kochorashvili, Dimitri Tskitishvili and Zviad Dzidziguri.

With this decision, the actual composition of the 11th convocation of the Parliament was determined to be 89 members instead of 150. In total, the mandates of 61 deputies have already been terminated.

Giorgi Gakharia's political union - unlike other opposition parties - did not withdraw its party list. In addition, the party "Gakharia for Georgia" will no longer receive funding from the state budget for the next six months.

The restriction will take effect from the first day of the next calendar month.

Government to subsidise loans for development of water infrastructure (Zakon)

PM discusses investment in green energy projects with head of Chinese company (Kapital)

EconMin meets Spain's minister of agriculture, discusses joint projects (InBusiness)

SOEs will be forced to return funds for unrealised projects to budget (Lsm)

Government allocates KZT 45bn for plumbing infrastructure in North Kazakhstan region (Kapital)

• Ambassador denies any competition, praises mutually beneficial relations
• Majority of local people said to support close cooperation with Russia
• Comments not surprising, confirm strong bilateral alignment

Kazakhstan's ambassador to Russia gave an interview to a Russian media outlet, in which he said the two countries are partners in the energy sector, not competitors. He suggested there is a functioning division in place, whereby Kazakhstan ships oil to Europe via Russian infrastructure, whereas Russia makes deliveries to India and China. The ambassador also noted joint efforts to develop renewable energy sources.

In general, the ambassador highlighted persisting traditions of mutually beneficial relations and support between Russia and Kazakhstan. He pointed to 'cultural and mental' ties between the countries and said the majority of local people want tight bilateral cooperation. The ambassador did admit 'some' are not happy with the countries' political alignment, but insisted their share remains minor.

Overall, these comments are in line with the official rhetoric maintained by both Russia and Kazakhstan when it comes to bilateral relations. The interview specifically addresses areas that have been identified as possible points of contention in the past, i.e. potential ethnic tensions and clashes on global energy markets. Both are dismissed by the ambassador, signalling strong alignment at this stage.

• Current policy rate: 16.5%
• Next monetary policy meeting: Jul 11
• Expected decision: hold

The NBK is expected to leave the base rate on hold in July, in line with multiple statements given by governor Suleimenov. We remind that the bank also left the rate at 16.5% in June, reiterating its concern about inflationary pressures. Since then Suleimenov addressed parliament and called the base rate 'adequate'. He outlined domestic price reforms, tariff hikes, and fiscal stimuli as the main inflationary factors at present. Externally, the central bank's main focus is on the tenge's depreciation against the Russian ruble. We also note that inflation expectations were high at 14.1% in May and could exceed this level later in the year.

Data Download

With regard to inflation, June saw an acceleration to 11.8% y/y (from 11.3% y/y). At the same time, monthly price growth eased for two consecutive months. While it is still above recent averages, it could be interpreted as a positive signal. Such arguments were made by bank officials ahead of the June decision and continuity is likely. We also note that Suleimenov's recent appearance in parliament triggered renewed criticism of the NBK's policies from some MPs, but he insisted that inflation management will remain paramount for the bank.

All in all, the NBK has signalled it intends to leave the base rate on hold until the end of 2025. It has not excluded monetary tightening, but that could become more likely later in the year, in our view. Apart from any additional tariff hikes, the bank will also need to account for price increases driven by the new tax code. As outlined previously, domestic enterprises are raising prices already, which could amplify inflationary pressures further.

• Company will review its discount policy

There will be no electricity price hike by the end of the year, Milutin Djukanovic, Chairman of the Board of Directors of the state power utility EPCG, told local media. However, he noted that the company would review its discount policy. Discounts will continue for consumers whose monthly bills do not exceed EUR 50 or those whose consumption is below 500 kWh (which includes the majority of users), Djukanovic said.

He confirmed that Montenegro will sign soon an intergovernmental agreement with France, creating conditions for investments in the energy sector. This includes a deal with the French power utility Electricite de France (EDF) to build the Krusevo HPP. He expressed optimism about the project and suggested the possibility of developing additional hydropower plants in the future. EPCG expects 82 MW Krusevo HPP to produce around 170 MWh of electricity per year.

• He intends to set up a new political formation, more details to come later this autumn
• The local elections will take place in the second half of October, with no official date scheduled yet

Kostadin Kostadinov, mayor of Strumica, announced he had frozen his membership in the SDSM, and would most likely stand in the coming local elections in October as an independent candidate, according to a Facebook post. He believes he could do more than the narrow confines of the SDSM would allow, and may prepare a new political platform. He added that the SDSM was lacking ideas, and did not allow development and growth. Kostadinov intends to announce more information about his new political formation in two phases, the first one in September, and the second one after the local elections in October.

Regarding the local elections, Strumica is not the most important city in the country, and it is the tenth largest one. Yet, it appears the SDSM is facing serious internal problems, after it lost the general election in 2024. Some already see Kostadinov's move as opportunistic, while others expect more issues within the SDSM. In his post, Kostadinov implied he may be seeking broader support, beyond the SDSM, but it remains to be seen if he is willing to co-operate with the ruling VMRO-DPMNE. The local elections date has not been officially scheduled yet, but expectations are that it will b either on Oct 19 or Oct 26. In case a run-off is required (in mayoral elections), it will take place two weeks after the first round, so likely in early November.

Why Bulgaria should amend its constitution first, and not Macedonia (Nova Makedonija)

New 11 SDSM candidates for mayors, Kostadinov to stand in Strumica (Sloboden Pecat)

Did the right kidnap student protests in Serbia? (Nezavisen Vesnik)

Interruption deterioration of security in our neighbours [on US President Trump's claims he prevented a Serbian intervention in Kosovo] (Nova Makedonija)

Germany shaken by the biggest increase in bankruptcies over the past decade (Vecer)

Ratkoceri: This is what Serbian world is (Koha)

Pentagon: Iran's nuclear programme delayed for two years (Sloboden Pecat)

[Public administration minister Minchev:] Half of civil servants either don't work whatsoever, or are looking for a way not to go to work (Vecer)

[PM] Mickoski insists on electronic population registration [in census] in the name of development (Koha)

Europe burns under the sun, temperatures of 46 C in Spain, red alert in Paris (Nezavisen Vesnik)

• Interconnector to be 70-km long, to have the capacity to transport 1.5 billion cubic metres of gas
• Gas link to help increase security of gas supply, facilitate cross-border gas transport operations

The state-run natural gas transmission company Nomagas has signed an initial deal for the construction of a gas link to Serbia with the Serbian public gas company Srbijagas, according to an official press release. The interconnector will be 70-km long and will have a capacity to transport 1.5 billion cubic metres of natural gas between the two countries. Some 23 km from the gas interconnector will be located in North Macedonia and the remaining 47 km will be located on Serbian territory. Nomagas commented that the development of the gas link will help increase the security of gas supply, balance supply and demand of natural gas and facilitate cross-border gas transport operations between the two states. Nomagas and Srbijagas pledged to implement the project quickly and support each other in the development of the gas link.

Nomagas and Srbijagas commented that the border crossing points for the gas interconnector have been already determined, which was an important step in the preparation for the implementation of the project. They also said that the technical documentation related to the gas link and the feasibility study related to the project will be completed soon. The feasibility study for the project has been supported by funds under the Western Balkan Investment Framework (WBIF) of the European Investment Bank (EIB). North Macedonia currently relies on Russian natural gas imports that are transited through Bulgaria under a contract with the Russian gas giant Gazprom that is set to expire in 2030

• Mickoski expects budget deficit to contract to below 3% of GDP in 2025
• Mickoski expects economy to enter new expansion period, grow between 3.5-4% this year
• Mickoski says improving industrial output, growing tourist arrivals, investments support GDP growth

The state budget deficit will turn out below the planned 4% of the projected GDP in 2025 and will not exceed 3% of GDP in 2026, PM Hristijan Mickoski announced on Wednesday. He noted that the budget deficit should have fallen below 3% of GDP several years ago and blamed the previous government led by the main opposition SDSM of missing the opportunity to implement a fiscal consolidation agenda. Mickoski said that a fiscal consolidation agenda is being implemented in economies across the world, and that his cabinet is also in the process of consolidating the public finances. He added that the fiscal consolidation process was delayed by what he called unreasonable spending by the previous government.

Mickoski also said that the World Bank is set to upgrade North Macedonia's economic growth forecast for 2025 to 3.0% from 2.6% in its Global Economic Prospects report from June. However, Mickoski said that according to the government's projections, the economy is expected to grow above 3.5% in 2025 with GDP growth reaching 3.7% or even 4% this year. He also stressed that the strong 9.4% y/y industrial production growth in May and the 9% y/y growth in manufacturing sector output in the month are very important indicators for North Macedonia's economic development. He added that the industrial output rose by 3.3% y/y in January-May and that production in the manufacturing sector rose by 4.5% y/y in the same period.

Mickoski commented that the latest macroeconomic indicators suggest that the period of consolidation and stabilization is over and that a new period of economic growth is beginning to emerge. He explained that the improving industrial output is complemented by a more than 20% y/y growth in tourist arrivals and higher investments. He expects the economy to grow at an exceptionally strong rate in Q2. Mickoski also claimed that the improving economic activity is a result of the improving business environment, characterised by a lack of political pressure on businesses, strengthening rule of law and a fierce fight against corruption and organised crime. He also said that the recommendations of the fiscal council are taken seriously by the government, which not only reviews and analyses them, but also welcomes all constructive comments. Mickoski added that the 2025 state budget revision provides the necessary funds for an increase in pensions.

• First set includes tax hikes, spending cuts; second one - SOE's reform, special pensions, NRRP objectives
• VAT rises to 21% and 11%, higher tax on banks, 10% higher excises, higher property tax, more healthcare insurance contributors
• Ministers to present details and fiscal impact today
• Fiscal impact in 2025 may not be sufficient to meet fiscal target, assessment in October may require new measures, we think

PM Bolojan announced that the government will approve two sets of fiscal measures in emergency procedure, with fast impact on the general government deficit. The first set comprises tax hikes and administrative spending cuts and the second will be approved later in July, envisaging SOEs reform, special pensions reforms and other measures that are translating objectives and milestones included in the NRRP, he added.

The first package of measures confirms a document leaked to local media, which includes: standard VAT rate hike to 21% from 19%, VAT rate in food, pharma, irrigations, books, firewood and thermal energy rises to 11% from 9%, excises on tobacco, alcohol and fuels rise by 10%, pensions above RON 3,000 monthly will pay healthcare contributions, higher tax on banks, higher tax on gambling, wage and pension indexation in 2026 not to be applied, slight increase of mandatory workload for teachers, lower scholarships for students, higher royalties, SOEs reform by reducing staff, bonuses and expenses, lower subsidies for parties, higher tax on dividend as of 2026.

Bolojan said that ministers will present details on each measure and fiscal impact today (Jul 3). However, the leaked document we mentioned before includes an estimated fiscal impact of 1.23% of GDP in 2025 and 3.75% in 2026 (including those measures enforced as of Jan 1, 2026).

Despite strong criticism from all sides (including several PSD influential members), Bolojan seemed determined to go ahead with his plan and we doubt he would give up any of the proposed reforms and actions. The estimated fiscal impact in 2025 may not be enough though, as the deficit should narrow to 7.5% of GDP from 9.3% in 2024, particularly considering that the economic growth might be below initial expectations. Nevertheless, the effects will be assessed in October, when another action plan is very likely to be considered to reduce the gap. Also, if this set of measures will convince the EC not to suspend EU funds from the RRF, public investment might not be as disappointing as in H1, giving a hand to the economic growth.

Paycheck for wage and pensions growth in 2024: Standard VAT rises to 21% from 19%, VAT in food and pharma increases to 11% from 9%. Impact of all measures is 1.23% of GDP in 2025 and 3.75% in 2026 (Ziarul Financiar)

PM Ilie Bolojan: "Workers in healthcare have no reason to strike. Their wages are not affected" (Adevarul)

Bolojan reform: Wages and pensions are frozen in 2026, additional tax on banks, higher excises on alcohol and tobacco (Adevarul)

Higher VAT on house purchases as of August. Warnings about price growth (Adevarul)

Opposition AUR criticises Ilie Bolojan after announcement about fiscal measures: "The people don't have to pay for corrupt system!" (Gandul)

Tax authority ANAF collects RON 245.22bn revenue in H1 2025 (Gandul)

Tax authority ANAF has new head: Bolojan appoint Adrian Nicusor Nica (Romania Libera)

PM Bolojan announces fiscal measures: VAT rises to 21% and 11% / Higher tax on banks / higher tax on gambling / Higher excises on tobacco, alcohol and fuels / Mire contributors to healthcare / Dividend tax rises to 16% (G4media)

Financial markets react positive to tough fiscal measures announced by PM Bolojan: RON appreciates, government borrowing costs decrease (G4media)

Goodbye transaction tax! Government keeps flat tax and avoids progressive taxation (Evenimentul Zilei)

Business environment message after fiscal measures announcement: Entire consumption will be affected and confidence sentiment will be shaken (Profit)

Massive price growth for fuels after Aug 1, due to higher VAT and excises (Economica)

Apartment prices in Bucharest increase further in H1 (Economica)

Ilie Bolojan: Government will present second fiscal-measures package in July, comprising special pensions, SOEs reform, subventions and bonuses (Economedia)

• Lower VAT rate on food and pharma may also be hiked to 11% from 9%
• Tax hikes and spending cuts to have 1.23%-of-GDP fiscal impact in 2025, 2.19% - in 2026
• Other planned measures: dividend tax hike to 16% banks' sales tax hike to 4%, higher excises and wider healthcare contributor base

The government is allegedly discussing with the EC a new set of fiscal measures meant to reduce the general government budget gap this year and in 2026, according to a draft document obtained by the economic news website Profit.ro. The document reveals a harsher fiscal consolidation than what local media and government representatives mentioned thus far. The most important one is reportedly a hike of the standard VAT rate to 21% from 19% as of August and a lower 11% rate (instead of 9% currently) in certain fields like food and pharmaceuticals. The estimated fiscal impact of the package is RON 10.6bn (0.6% of GDP) in 2025 and RON 33.6bn (1.6% of GDP) in 2026. Other taxes will rise as of 2026, adding RON 10.9bn positive fiscal impact next year.

In addition to the VAT rate, the government is considering to increase banks' sales tax to 4% from 2% as of August, to hike excises on tobacco, alcohol, sugar and to increase contributor base for healthcare insurance by including pensions higher than RON 3,000 monthly (instead of RON 4,000 rumoured previously). Tax on dividends and road toll is planned to increase as of 2026. On the expenditure side, the discussed measures will have RON 12.75bn fiscal impact in 2025 and RON 31.73bn in 2026.

Overall, all measures implemented as of August should have RON 23.36bn (1.23%) fiscal impact in 2025 and RON 44.48bn (2.19% of GDP) in 2026. Additional measures in 2026 and savings could bring up the positive fiscal impact in 2026 to 3.75% of GDP. Yet, measures have not been officially confirmed yet and sources say that the senior ruling PSD may not agree with a higher VAT in food and pharmaceuticals. PM Ilie Bolojan recently said that the fiscal measures would be announced today (Jul 2), but if no agreement was reached with the PSD, we believe the announcement may be delayed.

Romania constantly failed to reduce the deficit in line with the EU recommendations, so the general government budget deficit widened significantly, up to a historical high of 9.3% of GDP in 2024. The government committed in the 7-year fiscal consolidation plan with the EC to narrow it to 7.0% of GDP in 2025, but that would be almost impossible to reach considering budget execution figures so far and the failure to implement further fiscal consolidation measures. Even with a harsh fiscal-measures package, the gap might very probably go down to 7.5% of GDP, according to economist estimations, due to delayed fiscal reform and a higher-than-projected gap in 2024.

• Levy may target electronics, with rebates for domestic producers
• Business warns against turning duty into quasi-fiscal burden

The Russian government is considering introducing a new levy, which is an industrial duty targeting strategically important sectors, primarily electronics and microelectronics, Kommersant reports. According to industry and trade minister Alihanov, the proceeds would be directed to dedicated industry support funds. The new duty is expected to resemble the existing recycling fee in the automotive sector: both domestic producers and importers would be required to pay it, although Russian manufacturers would be compensated. While the Ministry has yet to provide details, it insists the duty will have little impact on final product prices - a claim that remains questionable. The Ministry frames the initiative as a response to dumping by certain countries (likely referring to China) and views it as a tool to protect the domestic market. However, it's worth recalling that a sharp increase in the car recycling fee previously drew criticism from professionals and contributed to a significant drop in vehicle sales. If the industrial duty is limited to microelectronics, mainly consumed by militarized sectors, the broader market impact may be minimal. But expanding it to cover a wider range of industries could lead to higher prices and weaker demand.

• Annual inflation slows to 9.39% y/y, ytd inflation stays inside CBR end-year forecast
• Rate cut and revised inflation outlook are more likely in July

The CPI increased by 0.07% w/w during the week of Jun 25 - Jul 1, surging after 0.04% w/w growth in the previous week, according to Rosstat's weekly inflation bulletin released on Wednesday evening. Though annual inflation decelerated again to 9.39% y/y and the ytd inflation reached 3.76%. The weekly acceleration was primarily driven by the services sector and, to a lesser extent, by price growth in non-food goods. Earlier this week, CBR deputy governor Zabotkin stated that the regulator could cut the key rate by more than 1pp at its July meeting if inflation follows a trajectory enabling it to reach 4% by 2026. On Wednesday, CBR governor Nabiullina also confirmed that inflation is easing faster than expected by the regulator. In the coming week and typically for several weeks after, the inflationary trend should strengthen due to the regular tariff indexation. However, the CBR is aware of this and it should not have a big impact on its policy decision. That said, we note that for the first time in a long while, the significant tariff hike for industrial consumers could have a more prolonged inflationary effect.

During Jun 24-30 food prices rose by 0.06% w/w, the same as in the previous week. Fruit and vegetables depreciated by 0.15%, slower than the previous week. Rosstat data no longer show accelerated growth in traditional "borscht basket" vegetables, but carrots and apples (also significant items) are now seeing relatively faster price increases. Other food goods appreciated by 0.08% w/w, decelerating compared to the previous week. Despite the ruble not weakening during the period and key items in this category (such as cars and household appliances) not showing faster price increases, non-food goods prices rose by 0.01% w/w, marginally accelerating compared to the previous week. Gasoline prices rose by 0.2% w/w and diesel prices increased by a slower 0.1% w/w, likely due to external controls amid a seasonal uptick in demand. In the services sector, inflation accelerated to 0.25% w/w due to a 0.5% w/w increase in household service prices.