• The amount was at the ceiling, borrowing costs remained stable
• The finance ministry has now issued money market instruments that mature in 2026 for CZK 40bn
• We estimate that gross financing needs were covered at 64.1% as of Sep 4

The finance ministry borrowed CZK 5bn through a T-bill that matures in July 2026, according to auction data reported by the CNB. The amount was exactly at the borrowing ceiling, and borrowing costs remained stable, with the average yield rising by 1bp when compared to August. This is yet another money market instrument issued that matures in 2026, bringing total T-bill issuance that meets that criterion to CZK 40bn so far. The finance ministry will offer one more T-bill that matures in 2026 this month, next Wednesday (Sep 10), this time denominated in EUR, for up to EUR 500mn.

Based on the information above, we estimate that the issuance of debt that matures after the end of 2025 has reached CZK 354.3bn as of Sep 4. The amount breaks down to:

• CZK 248bn in CZK-denominated bonds;
• CZK 57.8bn in net bond purchases to the issuer's portfolio;
• CZK 40bn in CZK-denominated T-bills;
• CZK 1.3bn in retail bonds (H1 2025 only);
• CZK 7.2bn in loans (H1 2025 only).

There is also a net inflow of CZK 9.4bn from operations with financial assets. The funding and debt management programme envisages a net inflow of CZK 7.4bn in the entire 2025. Gross financing needs are projected at CZK 567.5bn, which means they were covered at 64.1% of as Sep 4. If we include only the projected flow from operations with financial assets, then coverage would be 63.7%. We also remind that this is a strictly unofficial estimate, and we don't have all relevant data. Information on retail bonds, loans, and operations with financial assets in Q3 2025 will be published in mid-October.

• While Stacilo! is a separate political party, it was only created to go around the higher electoral thresholds for coalitions
• Brno regional court opened a big can of worms, saying that not only Stacilo!, but other parties used the same practice
• We expect the Constitutional Court to turn down motions that deny registration to these alliances
• However, it will likely question the legitimacy of the current political system and electoral process

Volt Czech Republic will appeal the denied motions it filed against coalitions that circumvent the electoral law at the Constitutional Court, the party confirmed. There were several similar motions, filed exclusively against the leftist Stacilo! and the SPD-led nationalist coalition, which were all denied, according to information of the interior ministry. Prisaha, another small party, filed similar motions as well, including against the Pirates-Greens alliance, which were also denied. Most regional courts denied the motions outright, but the Brno regional court left the door widely open for an appeal, as it admitted Stacilo! violated electoral legislation, but still denied the motion with the argument that dismantling their registration would be judicial interference in the general election.

To provide context, there are currently three alliances that deliberately circumvent coalition requirements set in the electoral law. These are the SPD-led nationalist alliance (4 parties, including the SPD), the Pirates-Greens alliance, and Stacilo! (4 parties, including the KSCM and SOCDEM). The purpose is to avoid the higher electoral thresholds set for coalitions, which are 8% for two-party coalitions and 11% for coalitions of three or more parties. In contrast, the electoral threshold for single parties is only 5%. All these alliances used a single political entity to register for the election. In the case of the SPD-led coalition and the Pirates-Greens, the registration took place through the SPD and the Pirates, respectively. In the case of Stacilo!, the entity is already registered as a political party (established in 2024), though the 4 parties in it have remained separate legal entities.

Brno regional court opened a big can of worms, saying many parties circumvented coalition requirements

The situation becomes more complex, as electoral law doesn't forbid parties to have non-partisan candidates, or candidates that are members of other parties. Thus, as long as a single entity is used for the registration, the letter of the law has been observed. There are some legal drawbacks for the parties that don't formally register, as they will have no legal ground to claim state subsidies, or introduce changes to candidate lists. Yet, it appears this has been settled, and no one is complaining. The thing is, the Brno regional court opened a big can of worms, as it not only said Stacilo! was problematic, but also that other parties were doing the same, meaning that even using an existing party to register was problematic.

The Constitutional Court will likely turn down motions to deny registration ...

Thus, there is a serious argument to appeal, which Volt Czech Republic is taking advantage of. We still expect that the Constitutional Court will deny the motion, as otherwise it will mean preventing 3 of the 7 formations competing in this election from participation. Given that all registration deadlines have passed, there will be no way for any of the parties involved to take part in this election if their current registration is withdrawn. Furthermore, we remind that the Constitutional Court already found higher electoral thresholds for coalitions as discriminatory, in a ruling from early 2021. It led to an urgent revision of the electoral law, though it turned out that ANO and Spolu both liked the idea, so they simply lowered the electoral thresholds for coalitions (they used to go up to 15%). If someone had contested the current coalition thresholds, the Constitutional Court would likely dismantle them as well, since nothing has really changed.

... but it will inevitably question the current political system's legitimacy

The bigger issue we see is related to legitimacy. Based on recent polling, we will likely see 15 or 16 separate parties in the next parliament, many of them having only a couple of seats. It will lead to a highly fragmented lower house, which in turn will make government formation very difficult. This will be a strong argument in favour of higher coalition thresholds, and of tightening the definition of what a coalition is (something recommended by all the rulings on these motions). Yet, until this happens, there will be plenty of political chaos, creating an impression that the current political system is increasingly dysfunctional. The potential danger is that it will be a fertile ground for extremist formations who claim the only way to clean up the system is by dismantling it. We have seen this in several European countries already, and it has always contributed to political instability. The Czech Republic has largely avoided such movement in the past decade, despite ANO's populism, but this relative peace may be coming to an end after this election.

• Large education subsidy and higher non-tax revenue base from 2024 still distort performance
• Finance ministry expects a CZK 35bn (0.4% of GDP) surplus at local government level in 2025
• When one-off effects are eliminated, local governments should see a surplus of slightly over CZK 30bn in H1

Local government budgets reported a surplus of CZK 64.6bn (0.8% of GDP) in H1 2025, lower by 21.8% y/y, according to figures from the finance ministry. We should note that there are still considerable discrepancies related to one-off transfers, such as central government subsidies to education, as well as the one-off revenue from recovered funds from Sberbank's Czech branch, which was fully resolved in 2024. The finance ministry claims that when one-off effects are eliminated, local government surpluses should reach slightly over CZK 30bn. This is in line with the full-year forecast for local government balances, which is a surplus of CZK 35bn.

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Regarding performance in H1 2025, non-tax revenues continued to be the main constraint to revenue growth, which reached only 2.5% y/y. However, own revenue fell by 0.2% y/y, which is entirely due to non-tax revenue, lower by 16.4% y/y. As mentioned above, this reflects the one-off intake last year, as when compared to H1 2023, non-tax revenue increased by 10.8% (and total own revenue was up 10.4%). In that regard, local governments also reported a considerable increase in non-investment transfers from the central government, which were higher by 8% y/y. Meanwhile, expenditure rose by 2.5% y/y, mostly due to a 6.3% y/y increase in current expenses. The finance ministry notes some potential for a boost in capital spending in H2, given that unrealised potential investment is projected at about CZK 60bn.

By government level, it was municipal budgets that reported the bigger decline in year-on-year terms, as their surplus reached CZK 28.9bn, lower by 31.3% y/y. The overall pattern remains similar to headline numbers, given that total revenue rose by 3% y/y, but own revenue was higher by only 1.2% y/y, due to an 8.8% y/y drop in non-tax revenue. Furthermore, non-investment transfers from the central government rose by 8.4% y/y. Meanwhile, expenditure increased by 9.9% y/y, with a 7.3% y/y rise in current spending. Regions were even more impacted by one-off effects, as own revenue fell by 5.2% y/y in H1, compared to a 2.1% y/y increase in headline revenue (due to a 7.6% y/y increase in non-investment transfers). Meanwhile, expenses were higher by 4.9% y/y.

The finance ministry noted that there was an ever deepening situation where local governments are accumulated savings through hefty transfers from the central government, which in turn are financed by debt. It noted that the situation was not sustainable in the long term, and there should be a reconsideration of how nationally collected taxes are distributed. Local governments have benefited in recent years, as the share of these taxes (like VAT, income taxes) increased. If a surplus of CZK 35bn is assumed, it will add up to about 0.4% of GDP, according to the latest finance ministry forecast, and the finance ministry apparently wants to save on financing needs as much as possible. The other side of the coin is that the central government probably could fund its debt cheaper than local governments ever could, except maybe the City of Prague. Thus, it is unclear whether there will be a net decline in general government debt if the revenue share for local governments is lowered.

• The print matched market expectations precisely; the CNB expected headline inflation at 2.7% y/y in August
• Food prices were the main reason for a softer headline print
• Service prices eased growth only slightly, by 0.1pps m/m to 4.7% y/y
• We estimate that core inflation remained flat at 2.7% y/y
• Given elevated core inflation and persisting inflation risks, we expect the CNB to maintain the policy unchanged in 2025

CPI inflation eased to 2.5% y/y in August from 2.7% y/y in July, according to a flash estimate from the statistical office. The print matched market (and our) expectations, which also saw inflation easing modestly to that level. The only exception is the CNB, which projected headline inflation at 2.7% y/y in August, though it also expected a slight slowdown. Consumer prices rose by 0.1% m/m, also matching market expectations.

Data Download

Food prices were mostly behind the softer headline print, as their growth eased from 4.9% y/y in July to 4.0% y/y in August. Interestingly, non-processed food prices reported a flat growth, at 7.8% y/y, so this could have been partially due to alcohol and tobacco prices, also included in that category. There was no meaningful change in the other categories, as energy prices reported a slightly softer decline, from 4.6% y/y in July to 4.4% y/y in August, which is entirely due to fuel prices.

All this means that core inflation likely remained flat at 2.7% y/y in August, which is also in line with our expectations. There may have been some slight fluctuations, but overall, we expect that the final print will confirm that core inflation has once again remained above the headline. In that regard, service prices rose by 4.7% y/y in August, slower by only 0.1pps m/m, and in line with its robust increase seen over the past 4 years. Given the Q2 wage print, we are not optimistic about service prices reporting a moderating growth, as services are the sector where wage growth remained the strongest and most persistent. It is also the only sector that has seen a steady increase in employment, indicating there are still labour shortages. We remind that service prices are the main component of core inflation, implying that inflation risks will remain solid.

Monetary policy impact

Given that the source of softer headline inflation comes from volatile prices, mostly foods, we don't believe the flash CPI print will change anything regarding monetary policy. Core inflation is likely to remain elevated, in line with the CNB's forecast, which puts it at 2.8% y/y in Q3 2025. The CNB board has been focusing heavily on core inflation developments, and these do not suggest that structural risks to inflation have disappeared. Quite the contrary, recent economic data suggests that service price inflation will likely remain sticky for some time longer, which is why we don't see any room for rate cuts in 2025.

The detailed CPI release will be published next Wednesday (Sep 10), at 9:00 CET.

• The solidarity component will rise by CZK 240 monthly, while the merit component will rise by 2.6%
• The fiscal impact is projected at CZK 22.5bn in 2026
• Labour minister Jurecka said pensions rose by 18% in real terms over the past decade, and by 28% in nominal terms during this government's term

Pensions will rise by an average 3.2% in 2026, labour minister Marian Jurecka told journalists on Thursday (Sep 4). The increase includes a CZK 240 monthly increase in the solidarity component of pensions, and a 2.6% increase in the merit component (i.e. the one based on income). The fiscal impact of the increase is CZK 22.5bn in 2026, with total pension spending reaching CZK 737.9bn. Jurecka mentioned that after years of deficit, the state pension system could report a surplus of about CZK 15bn in 2026. The reasons are related to the government's pension reform, most of all the way pensions are indexed. We also believe that tightening the options for early retirement are currently producing some short-term term savings, which will eventually peter out.

Jurecka also said pensions had increased by 18% in real terms over the past 10 years, and their nominal increase was 28% during this government's term. While correct, it was that sharp increase that made the government revise pension legislation, so there will be no longer such a substantial indexation of pensions in the future. We remind that under previous legislation, pensions were indexed by inflation and half of real wage growth, while under current rules, the weight of the wage component was brought down to a third. Moreover, pensions used to be fully indexed to inflation if consumer price growth exceeded 5% since the latest indexation. The new rules state that instead of a permanent increase, there will be a one-off compensation during periods of high inflation.

These are all things that ANO wants to dismantle, however, so there is a non-negligible political risk that the pension indexation regime could revert to its old state, leading to renewed deficits in the pension system.

• The Czech armed forces are purchasing 44 Leopard 2A8 battle tanks

The government approved a CZK 34.3bn purchase agreement for 44 Leopard A28 battle tanks, according to a press release from the defence ministry. The pure price is CZK 32.8bn, but the defence ministry will also pay CZK 1.5bn for adjusting the tanks to Czech army standards. There is also a CZK 5bn reserve clause in case of inflation and exchange rate fluctuations. With this purchase, the Czech armed forces will have 58 battle tanks at their disposal. Furthermore, the Czech armed forces plan purchasing 19 more Leopard tanks in various modifications (like engineering, salvage, bridge, etc.), aiming to have between 61 and 77 tanks.

The first tanks are expected to be delivered in 2028, and the order will be completed in 2031. There will be an advance payment, but the defence ministry did not specify what amount and when it will be made. We suspect that this is one of the items that will boost the defence budget in 2026, as defence spending is planned to reach 2.35% of GDP. When the order is completed, the Czech army will be able to fully retire its T-72 tank fleet, which we expect to be donated to Ukraine, in case the country is still in a war.

Average [monthly] wage nears CZK 50,000. Czechs are better off than their pay cheques suggest (Hospodarske Noviny)

"There are no people." Wages in the Czech Republic grow fast (Mlada Fronta Dnes)

Foreign troops in Ukraine are unacceptable to Russia, Kremlin reacts to EU plan (Lidove Noviny)

Stacilo! violates the [electoral] law, court said. But it did not intervene (Pravo)

I am doing everything possible so that Toyota's expansion in the Czech Republic doesn't end with a single SUV, says Robet Kiml (E15)

[Emission] Allowance prices are facing upwards, natural gas becomes pricier, up to CZK 17,000 annually (Pravo)

Education is no longer a priority, Mr Prime Minister? Budget bill is a political confession (Lidove Noviny)

Students would rather pay rent than for a dormitory (Mlada Fronta Dnes)

A dangerous debt spiral (Hospodarske Noviny)

Ranking of 10 most profitable Czech and Slovak firms. How did AI calculate their assets? (E15)

• Yet, the court decided not to dismantle Stacilo!'s registration
• Its argument was that it would represent judicial interference in the electoral process, and that other parties did it as well
• The court recommended legislative action to remedy a vulnerability in the electoral law
• The thing is, such an argument could easily be appealed, so the court drama will likely continue
• We don't expect any party to be thrown out of the election, but it will insert additional controversy in an already polarising campaign

The Brno regional court ruled that Stacilo!, a leftist coalition, has violated the electoral law by circumventing the requirements for coalitions, according to the official ruling. However, the court did not dismantle the electoral registration of Stacilo!, as there are other formations circumventing the law the same way. Its arguments were that it would be a very harsh punishment for something that the regional electoral authority should have done. Furthermore, it would be unfair to direct such punishment only towards Stacilo!, given that other formations were using a similar practice. The court also noted that this practice indicated a vulnerability in the electoral law, and urged for legislative action to define what exactly is considered a coalition.

The whole issue is related to the higher electoral thresholds applied for coalitions in Czech electoral law. Two-party coalitions need to clear 8% of the vote to enter parliament, while coalitions of three or more parties need to clear 11%, rather than the 5% required for single parties. What the parties in Stacilo! did was to register it as a separate political party, and then simply use it as a vehicle to register for the election. The two other informal coalitions, the nationalist one led by the SPD, and the Pirates-Greens alliance, simply registered under a single party, the SPD and the Pirates, respectively. Technically, this doesn't violate the law, as only a single political entity is registering.

The biggest downside of this ruling is that while the court agrees that Stacilo! is circumventing coalition rules, it will not do anything about it, as it is too late and would represent judicial interference in the electoral process. We find that reasoning a bit thin, and it could be easily attacked at an appeals court. Volt Czech Republic, the party that filed the motion against Stacilo!, is still considering further legal action, but the Brno regional court has given them strong reasons to appeal that ruling.

We do agree with the court that the solution to this issue should be political, rather than judicial. This is the first election when parties have used that practice, and at a large scale, as the same ruling could be issued against the SPD-led nationalist coalition, or against the Pirates-Greens alliance. Yet, by declaring that the law has been broken, but nothing will be done about it, the Brno court undermines its standing, and opens the door for even further judicial interference. We believe the Prague city court acted in a much smarter way, arguing that this was an issue outside the competence of the courts, so it turned down a similar motion without deliberating whether electoral law was circumvented.

Thus, it appears there will be some court drama around this election after all, and the matter will inevitably reach the Constitutional Court. We don't expect any registration to be thrown out, however, with the conclusion being that this is a matter to be resolved through legislative means. We remind that the Constitutional Court threw out the higher electoral thresholds for coalitions in 2021, arguing they were discriminatory. Yet, ANO and the parties in Spolu liked them, and inserted lower thresholds instead (the previous one reached up to 15%). The thing is, if someone had attacked the currently existing thresholds, the Constitutional Court would probably throw them out, too, as nothing has essentially changed since the 2021 ruling. The main downside is that this will insert yet another controversy in this electoral campaign, which has already been quite polarising. The odds are that this may dissuade some voters from going to the polls, raising the odds for smaller fringe formations to make it past the electoral threshold.

• Markets have finally reflected the CNB's hawkish messaging and no longer price rate cuts before early 2026
• Inflation expectations remain anchored to the 2% target in the medium term
• Markets are far less optimistic than the CNB about GDP growth, expected it at 2-2.1% in 2025-2026

Financial markets expect no change in the policy rate at the MPC meeting in September, according to the latest monthly survey of the CNB. There are no longer panellists who think that the CNB will deliver a rate cut in 2025, though the majority of expectations suggest one more 25bp cut in early 2026. We find that plausible, though it will largely depend on inflation developments. Notably, there are only 4 out of 16 panellists who expect the policy rate may fall under 3.25% by August 2026, and there are 5 who expect that the policy rate will remain unchanged even at that point. Thus, market expectations have now firmly switched towards a more cautious position, finally reflecting the hawkish messaging coming from the CNB board.

Inflation expectations edged up slightly, as markets expect year-on-year inflation to reach 2.24% y/y in August 2026 (up 0.03pps from the previous survey) and 2.16% in August 2028 (up 0.01pps). Notably, there are still considerable fluctuations in projections, as the forecast range for inflation in August 2026 was 1.8-2.6%, while the one for August 2028 was 2-2.5%. The key point is that projections remain firmly within the CNB's inflation tolerance band (2%+/-1pp), though skewed towards the upper half. Furthermore, inflation expectations are in line with those in the latest CNB staff forecast, which puts inflation at 2.2% y/y in Q3 2026. Thus, it can be argued that markets' inflation expectations remain anchored to the 2% inflation target.

Markets do not share the optimism of CNB staff about GDP growth, however. GDP projections did improve a bit, but they are now at 2.1% in 2025 and 2% in 2026, both rising by 0.1pps from the previous survey. In contrast, the CNB now expects GDP growth at 2.6% in 2025 and 2026, so there is a pretty big discrepancy. Furthermore, projections for GDP growth in 2025 are in the 1.9-2.5% range, so even the strongest forecasts are below that of the CNB. There is a slight overlap in the 2026 forecast, which is in the 1.1-2.8% range, but it is still narrow. The consensus matches our expectations, namely that there was front-loading of business activity in H1 2025, so H2 will likely see a much weaker activity. There was no major change in expectations for nominal wage growth, which is expected at 6.3% in 2025 and 5.1% in 2026. The CNB expects wages to rise by 6.6% in 2025 and 5.5% in 2026, but at least when 2025 is concerned, early numbers suggest nominal wages will beat both the CNB's and market expectations.

Click here for our comprehensive database of macro forecasts.

• No major surprises, the Motorists look like they are making it past the 5% threshold
• With 7 formations in the next parliament, it will be increasingly difficult to establish a government

ANO, the leading opposition party, remained in the lead with 32.2% in August, but it lost 2.7pps m/m, according to the latest opinion poll of Ipsos, carried out on Aug 28-31. Spolu, the backbone of the current government, is still second at 21.5% (down 0.4pps m/m), at slightly more than 10pps behind ANO. There were no major surprises below, as the SPD-led coalition remained third at 11.5% (up 0.1pps m/m), while STAN, the other government partner, was basically tied at 10.9% (up 0.9pps m/m). STAN may have gained some voters due to a stronger activity, but it doesn't make a big difference.

The Pirates-Greens coalition was still fifth at 7.6%, but it lost 1pp m/m. It makes it effectively tied with the leftist Stacilo! coalition, which follows at 7.1% (up 0.8pps m/m). The Motorists close the list of formations that will make it to the next parliament, polling at 5.6% (up 1.7pps m/m). The fluctuations with smaller parties are mostly explained with the volatility of undecided voters, who tend to switch from one formation to another. As the campaign is entering its final stage, however, we are to see voter preferences finally settle. There are already some patterns established, as the only unknown remaining is whether the Motorists will make it past the 5% electoral threshold. Regarding the rest, there is also room for surprises, especially if currently undecided voters make a choice at the last minute.

With 7 formations in the next parliament, however, forming a government will be increasingly difficult. The more formations there are, the more seats ANO will need to establish an absolute majority. The party's plans for a minority government appear increasingly elusive, as it wouldn't be able to justify a minority government with only about a third of the seats in the lower chamber. Furthermore, the presence of many smaller parties in the next parliament will complicate things, so establishing the next government will take a while.

• Cumulative sales rose by 5.4% y/y in January-August, reaching 161,067 units
• Skoda did worse than the market in August, seeing a 6.6% y/y fall
• Petrol car sales led headline growth, but sales of plug-in hybrids more than doubled
• The EV segment had a market share of 9.7% in January-August, up from 4.2% a year ago, and 7.3% in the entire 2024
• Total new vehicle sales increased by 5.2% y/y in August and 2.9% y/y in January-August

New passenger car sales rose by 8% y/y (wda) in August, reaching 17,611 units, according to figures from the statistical office. In non-adjusted terms, sales increased by 3.1% y/y, as there was one more working day a year ago than this year. Cumulative passenger car sales rose by 5.4% y/y in January-August, adding up to 161,067 units. Skoda, the most popular local brand, performed weaker than the market this time, its sales falling by 6.6% y/y in August. Nevertheless, Skoda sales continued to outperform the market in cumulative terms, up by 6.4% y/y in January-August.

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Petrol cars drove growth again, though not by such a strong lead as in July. Petrol car sales increased by as much a 12.9% y/y in August, followed by plug-in hybrids, where sales rose by 2.1 times in year-on-year terms. Sales of battery electric cars were up by a solid 12.7% y/y, as the segment continues to grow rapidly. In cumulative terms, petrol car sales led growth as a well, up by 8.2% y/y in January-August. However, the margin with the EV segment was even narrower, as batter electric car sales were up 54.4% y/y, while sales of plug-in hybrids increased by 74.1% y/y. As a result, the market share of the EV segment reached 9.7% in January-August, up from only 4.2% a year ago (and 7.3% for the full 2024). At this rate, the EV segment will likely break the 10% market share before the end of 2025, though when compared to Northern Europe, the share of EV sales is still relatively low.

Used passenger car sales reported a spike in August, rising by 2.3 times in year-on-year terms. It pushed used passenger car sales to a 12.6% y/y increase in January-August, though new passenger car sales have been consistently higher on a monthly basis.

Total vehicle sales, including buses, motorcycles, trucks, trailers, etc, increased by 5.5% y/y in August, out of which new vehicle sales were higher by 5.2% y/y. In cumulative terms, total vehicle sales rose by 3% y/y in January-August, out of which new vehicle sales rose by 2.9% y/y.

• Data shows faltering of retail sales' upward momentum, in our view
• Outlook on household consumption remains positive in general, we think
• All three retail sales segment contribute to weak July print

Retail sales growth slowed down to 1.7% y/y in July compared to 3.0% y/y in the previous month, the statistical office (KSH) reported. The print came below the average 2.9% y/y growth for the Jan-Jul period, in our opinion highlighting a loss of the previous upward momentum. Seasonally-adjusted retail sales slipped by 0.5% m/m in July and the adjusted data also displayed some faltering in the recovery trend during the past few months. The stabilisation of retail sales has corresponded to similarly flat trajectory of real wages and the labour market, so we do not see reasons for concerns for the time being. We expect that household consumption will remain fairly robust but will lack the potential for further increased contribution to overall economic growth without significant shift in the underlying propensity to spend. Demand conditions on the goods market should therefore remain neutral to the inflation outlook, in our view, as inflation seems driven mostly by external factors and sticky services inflation at this stage.

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Data Download

The slowdown in the headline retail sales print in July was on account of all three major segments. Food retail sales moderated to 2.3% y/y growth in the month. Food sales have been quite volatile in the past few months, which we ascribe to the significant swings in food prices. July's outturn was below average, possibly again influenced by the surprising uptick in food inflation in the previous month and by the weakening of tourism, in our view. Food consumption should still remain well in positive territory on average in the short term due to strong purchasing power, we expect.

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Non-food sales rose by 2.9% y/y in July, which was the weakest increase since the beginning of the year. The slowdown seemed due to manufactured goods in non-specialised stores and to consumer durables. The weak print, however, could be rather due to a confluence of factors, including increased travels abroad for the summer holidays and might not necessarily indicate worsening propensity to spend, we believe. There has been no sustained downward pressure in any of the non-food retail sales segments, we note. In general, households' borrowing appetite has remained fairly strong, so non-food consumption will likely rebound again in the next months and maintain a solid course, in our view.

Fuel sales dropped by 2.4% y/y in July, reversing the 2.5% y/y increase in the previous month. Lower foreign tourism inflows probably contributed in part to the weakening trend in fuel sales in July, we think.

Hungary's largest industrial digitalisation event is coming in September (Magyar Nemzet)

This was quick: HUF 4.5bn is already collected from Budapest's account after court takes away legal protection of capital municipality (Magyar Nemzet)

More than four hundred drugstore products have become cheaper since introduction of margin reduction (Magyar Nemzet)

Fuel price hike in Hungary: Is it serious? (Vilaggazdasag)

This could be Hungary's newest bridge on Danube: There is already government decision on handover date (Vilaggazdasag)

Hungarian gas supply vulnerable due to import, but not currently in danger (Vilaggazdasag)

Economy minister Marton Nagy says budget deficit to reach 4.5% of GDP in 2025, reveals big secret about BYD factory in Szeged, sends message to American credit rating agencies (Vilaggazdasag)

After PM Viktor Orban's warning, opposition leader Peter Magyar comes up with his own tax calculator (Heti Vilaggazdasag)

21 Research Centre: Tisza Party leads by 16pps among confirmed voters (Heti Vilaggazdasag)

• EC rules out Hungary gaining access to frozen EU funds in any way
• EC should submit opinion on government proposal for EU fund re-allocation till end-October

The government has reportedly tried to exploit a loophole for getting access to part of the frozen EU funds, according to the news portal Portfolio. The loophole represented re-allocation of EU funds from frozen programmes to other programmes as part of a mid-term cohesion policy re-programming, introduced to improve flexibility and facilitate EU fund absorption in general. Hungary, however, will not be able to receive EU funds affected under the conditionality mechanism in any form, EC spokesman Balazs Ujvari said yesterday, in effect ruling out the possibility of avoiding the EU fund sanctions. The loophole would allow the re-allocation of only a limited part of EU funds and not up to the full amount, the portal claimed. The re-allocation could affect around 10-15% of total EU funds worth EUR 5.4bn, it said, translating into EUR 500-800mn.

The re-allocation would be made under a proposal by the government, which was due to be submitted to the EC by the end of August. The EC should have a two-month period to either accept the proposal or to send it back to the government for revision. The EC has refused to provide information on the EU funds affected by the government proposal for re-allocation, saying that these parameters were subject to change during the negotiations and the data will be disclosed only after a final agreement. Portfolio reminded that the total cohesion policy package to Hungary was worth EUR 21.9bn, out of which EUR 9.7bn have remained frozen. In addition, Hungary has lost EUR 1.01bn of cohesion funds due to delays in absorption and further EUR 780mn have been deducted by the EC due to the government's refusal to respect the EU Court decision on asylum policy.

• Trump doesn't signal US troops will be pulled out of Poland, says the total might even be upped
• Trump greets Nawrocki in friendly way, likely strengthening the latter

President Karol Nawrocki visited US President Donald Trump in the White House on Wed. and despite a notable dearth of foreign experience, had what in political terms will be considered a good meeting. The press conference saw Trump greet Nawrocki warmly and express happiness that Nawrocki won the presidential election. The key statement was that Trump said the US military presence in Poland would not be reduced -- which would have been a disaster for Nawrocki -- but might even be increased, though this might have been a bit of a throwaway statement from Trump. In the end, little of substance seems to have been agreed, but the relationship looked strong, that will likely help Poland's standing with Trump, and it will likely help Nawrocki's standing in Poland.

Overall, Trump can be capricious, to say the least, and there was always a risk that some major statement would arise. Before the meeting, there were reports in Poland that during a conversation with European leaders in early August Nawrocki had pressure Trump on Ukraine and those statements had led Polish leaders not to be invited to the White House for the meeting of European leaders and Trump. If that was true, all has been forgiven and Trump did not announce anything like a pullout of US troops, though US Defense Secretary Pete Hegseth has been talking here and there about drawing down US troops in Europe. This might still happen, but the fact Poland spends nearly 5% of GDP on defense, the highest in NATO by far and over 1pp more than the US itself spends, will probably insulate Poland from such potential drawdowns, at least at the beginning (though the US's decision-making on this issue is very hard to predict at this stage).

In domestic political terms, the Cabinet Council meeting was seen as a PR problem for Nawrocki as PM Donald Tusk was allowed to shine. Nawrocki has already vetoed seven bills, and is definitely part of the domestic political battle, defying the usual Polish presidential practice of staying above the fray. This did lead Nawrocki's trust rating well down in one survey released recently. The Trump meeting will likely help Nawrocki, but much will depend on how his very active domestic actions will be taken as the novelty of his being president wears off.

Without surprise, MPC again cuts rates [story is placed well back in business section] (Rzeczpospolita)

Trump: US army will remain in Poland [President Nawrocki met Trump on Wed. in a meeting that avoided gaffes, avoided having Trum say he would pull troops out, and saw Trump say US presence might even be increased if PL wanted] (Rzeczpospolita)

Defense Minister and Deputy PM Kosiniak-Kamysz: On security matters cooperation is good (Rzeczpospolita)

Poles are further away from Ukraine: only 34% believe UA should join NATO, 53% oppose such a move (Rzeczpospolita)

Value of Polish economy tops USD 1tn [making Poland the 20th biggest economy globally and highlighting the success of the post-1989 transformation; daily notes this provides strong basis for PL to join G20; Foreign Minister Sikorski says he sought G20 entry in meeting with US's Rubio] (Rzeczpospolita)

Poland is 20th biggest economy in world, it will rise even further (Rzeczpospolita)

Fight in State Tribunal over Supreme Court head Manowska's immunity [sitting adjourned to Sep 22] (Gazeta Wyborcza)

NIK uncovers many irregularities committed on CPK during PiS reign (Gazeta Wyborcza)

Right wing undertakes massive attack on health care education (Gazeta Wyborcza)

Will US court decision change future of AI? (Rzeczpospolita)

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

Rationale: The Monetary Policy Council delivered on the consensus and on Wed. decided to cut its official rates by 25bps, taking the key rate down to 4.75%, the lowest since April 2022. The reduction brought the total easing to date to 100bps via a 50-bp cut in May, a 25-bp cut in July, and a 25-bp cut in September. The cadence does appear to be a move every two months, which, though possibly due to calendar scheduling, does suggest that the MPC might be cautious in regards to cutting again at its next policy sitting on Oct 7-8.

The MPC said outright that its September cut was due to falling CPI inflation, which it noted in its post-sitting statement fell to 2.8% y/y in August from 3.1% in July, with core inflation also slowing. The 2.8% y/y rate is just above the 2.5% target, with core inflation likely to have been around 3.0% y/y in August, which is much lower than the NBP thought.

The MPC's statement was pretty slight, but it did note that fiscal policy, a consumer demand recovery, and elevated wage growth remained risk factors for low inflation. Fiscal policy has arguably worsened since the July sitting, with the government now expecting a general government deficit of 6.9% of GDP this year, not the 6.3% previously expected. Consumer demand was strong in Q2 and should be solid for the rest of the year as real wage growth continues to be relatively solid. Wage growth did slow in July, which likely helped bring about the cut, but the MPC noted in its statement that wage growth did remain fast.

Against this backdrop, the outlook for a cut in October is cloudy, though NBP and MPC chair Adam Glapinski will hold his monthly presser on Thurs. at 15:00 CET, and he should help clear up the outlook. Key will be whether he doesn't rule out another cut in October or whether he rather guides expectations to November, when the new inflation projection will also be released that will help firm up the outlook. For now, we expect the MPC to be cautious since cutting every consecutive month would make its "adjustment" rhetoric uncredible, but as the September cut was brought about in a large way by the fact CPI inflation slowed to 2.8% y/y, the October prospects will likely be data dependent and any further slowdown of inflation could very well change the outlook for a cut next month, depending, of course, on how Glapinski frames the situation on Thurs.

Archived video of all MPC press conferences

MPC's post-sitting statements

Latest council minutes

Latest NBP inflation report (July 2025)

Most recent MPC voting results

• MPC continues to term its rate cut an 'adjustment'
• MPC doesn't tip hand for future decisions, but sees risks in fiscal policy, demand, wages
• NBP's Glapinski to speak more on outlook at his Thurs. presser

The Monetary Policy Council said that it decided to cut official interest rates by an across-the-board 25bps due to inflation developments that had lowered CPI inflation to 2.8% y/y in August and cut core inflation as well, according to a short post-sitting statement. "Taking into account inflation developments, in the Council's assessment, it became justified to adjust the level of the NBP interest rates," it said. The key word here is probably the fact that it continues to call its rate cuts "adjustments" and so wants to continue to avoid saying it is in an easing cycle despite the fact it has now cut three times at the past four policy sittings.

For the next rate decision on Oct 7-8, the MPC did not reveal its cards, giving its usual statement about future decisions being based on inflation and economic activity. But it did continue to say that fiscal policy, a consumer demand recovery, and elevated wage growth remained risk factors for low inflation. It also noted that uncertainty stemmed from the level of administered energy prices and inflation developments abroad, following, among others, changes in global trade policies.

Overall, the MPC's post-sitting statements aren't very instructive these days, but NBP and MPC chair Adam Glapinski will give his presser on Thurs. at 15:00 CET and that should make it clear whether the council will consider another "adjustment" -- that is, rate cut -- at its October sitting or will prefer to wait until its Nov 4-5 sitting. Many MPC members' comments seem to see only one further 25-bp cut this year, and delivering this in October would seem premature since that would beg the market to begin pricing in more. November also sees the next update of the inflation projection and the MPC likes to time its moves to those reports, suggesting that after having already cut by 100bps this year, the next likely date for a cut will be in November. Still, Glapinski's comments should be key for whether perhaps the MPC's view has improved and a cut in October can't be ruled out.

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

Poland's Monetary Policy Council decided Wed. to cut its key rate by 25bps to 4.75%, according to a statement. The MPC will publish its post-sitting statement at 16:00 CET. The decision matches the consensus expectation, though there were scattered expectations of a hold. NBP and MPC head Adam Glapinski will give his monthly press conference on Thurs. at 15:00 CET to further explain the move beyond what is in the usually brief post-sitting statement.

Data Download

Overall, the MPC cut by 50bps in May and then another 25bps in July, with the new move bringing to 100bps the scale of cuts so far. This might look like an easing cycle on the surface, but the MPC has been careful to term its moves "adjustments" as it appears to want to avoid building up rate cut expectations too much. This was seemingly based on its desire to have more room to move in the face of the many uncertainties out there, to domestic factors like power prices and fiscal policy to the many foreign uncertainties. But CPI inflation slowed to 2.8% y/y in August from 3.1% in July and is likely to remain benign for some time, particularly with muted economic activity, though fiscal policy will likely be seen as a continued source of worry. That latter fact is likely to see the council continue to talk about "adjustments," and having cut by 100bps since May, it seems likely to weigh to waiting to November, and the inflation projection to be updated then, to potentially move next.

• Minister says Polska 2050's proposal to tax excess profits was superior to FinMin's CIT hike idea

Fund and Regional Policy Minister Katarzyna Pelczynska-Nalecz, who hails from the junior ruling Polska 2050, said Wed. that there was room for talks with Finance Minister Andrzej Domanski about how best to tax banks since her party's support for a tax on excess profits was superior to a hike of CIT, according to comments cited by the state news agency PAPs. Domanski's FinMin proposed recently to hike the CIT on banks to 30% in 2026 from the regular 19% in order to raise some PLN 6.6bn next year. Pelczynska-Nalecz said a tax on excess bank profits was preferred since it would tax the excess profits banks generate as a result of overpricing loans. This tax would thus give banks the incentive to lend more widely, which would also be stimulative for the economy.

The minister likewise suggested that such a tax might be more amendable to the opposition Law and Justice (PiS), which could then push President Karol Nawrocki to sign the related legislation.

Overall, when the Finance Ministry published recently its idea of increasing the corporate tax rate on banks, the natural understanding was that the measure had been agreed by the ruling coalition. But Pelczynska-Nalecz's comments suggest this might not be the case and that there might still be room for discussion among coalition parties. This might still mean that the CIT hike won't be done, or, rather, perhaps it means there could be a CIT hike and some sort of windfall tax. Thus, before President Nawrocki even gets the legislation, there could still be some uncertainty. It should be added that tax hikes must be passed by end-November to go into effect the next calendar year.

• Investors submit orders worth 9.5 times final deal size
• Pricing drops 62.5bps below initial guidance across both maturities
  

The Turkey Wealth Fund (TWF) borrowed USD 1bn in a two-tranche five- and ten-year US dollar bond issuances, USD 500mn each, the local media reported. The transaction showed demand coverage of more than 9.5 times the final deal size. The ten-year notes were priced at a final yield of 7.75%, tightened from the initial guidance of 8.375%. The five-year notes were priced at a final yield of 7.0%, tightened from initial guidance of 7.625%. Strong demand enabled the TWF to compress pricing across both maturities, we think. The TWF mandated a broad syndicate to arrange the transaction. The banks included BBVA, Citi, Emirates NBD Capital, ING, Bank ABC, BofA Securities, First Abu Dhabi Bank, ICBC, IMI Intesa-Sanpaolo, JP Morgan, SMBC, Societe Generale, and Standard Chartered Bank.

The TWF, commanding an equity base of TRY 1.5tn, presides over a diversified portfolio comprising 31 entities spanning seven sectors. The fund reinforces its stature as a pivotal entity within Turkey's nationally significant corporations through strategic stakes in flagship listed enterprises on Borsa Istanbul, including Turkish Airlines, VakifBank, and Turk Telekom.

CHP objects to court's decision on Istanbul provincial congress (Hurriyet)

Transport minister Abdulkadir Uraloglu: We complete 50% of Bayburt-Gumushane airport infrastructure (Hurriyet)

CHP leader Ozgur Ozel visits imprisoned IMM mayor Imamoglu (Hurriyet)

Foreign trade deficit decreases by 16.7% y/y in August (Sozcu)

Vice President Cevdet Yilmaz: Inflation is in line with CBT's target (Sozcu)

Whiting and red mullet instead of bonito: Sharp rise in fish prices (Sozcu)

Bloomberg: State banks sell USD 5bn following cancellation of CHP Istanbul provincial congress (Sozcu)

Request for 50% increase in service fees in Istanbul: Shortest distance could reach TRY 3,800 per month (Sozcu)

Economic mission to be organised between Belgium and Turkey (Sabah)

Defence minister Gorgun: August exports in defence industry reach USD 834mn (Sabah)

FinMin Mehmet Simsek: Disinflation process continues uninterrupted (Sabah)

• Next MPC meeting: Sep 11, 2025
• Current policy rate: 43.0%
• EmergingMarketWatch forecast: Cut by 150-250bps
• Rationale: High inflation, credibility concerns, political risks limit CBT's cutting flexibility

We anticipate the CBT will moderate its monetary accommodation trajectory during the forthcoming MPC session, prompting a downward revision of our rate cut forecasts to 150-250bps from our previous estimate of 250-350bps. This recalibration stems from four critical considerations. First, August CPI readings registered 2.0% m/m, substantially exceeding market consensus of approximately 1.75% m/m. Achieving the CBT's year-end inflation target of 24% necessitates average monthly inflation of roughly 0.5% for the remainder of the period - a scenario we deem improbable given Turkey's historical autumn inflationary pressures. In this regard, below, we add a figure that demonstrates pronounced inflation volatility potential. Although it has eased somewhat since mid-2023, it still remains elevated compared with the pre-crisis period, underlining persistent instability in the inflation process, we note. Notable disparities also persist across inflation expectations among households, corporate sector participants and financial market constituents, we remind.

Inflation Volatility: 12-Month Rolling Std. Deviation

Secondly, while current real interest rates provide substantial scope for monetary loosening, the CBT established explicit commitments during last month's inflation report presentation, pledging comprehensive measures to achieve the 24% target. Current inflation readings, coupled with anticipated PPI pressures in subsequent months, might complicate policy deliberations. We think the CBT confronts a strategic trilemma: abandoning stated commitments, adopting heightened hawkishness to preserve credibility or implementing substantial rate reductions while compromising target achievement.

Data Download

Thirdly, recent GDP figures, in our view, put the CBT's output gap estimates and forecasting methodologies under the microscope. Despite relative domestic demand moderation compared to historical periods, underlying strength persists, evidenced through robust vehicle sales in ODMD statistics, for instance. Sustainable disinflation requires effective demand management as temporary achievements absent structural adjustments typically yield subsequent complications, we remind. Current approaches appear oriented toward achieving price stability while preserving growth momentum, potentially viable short-term through elevated rates, capital inflows, and lira real appreciation, yet unsustainable long-term, we note.

Last, but not least, the CHP Istanbul congress cancellation triggered severe market reactions, reportedly generating reserve losses exceeding USD 5bn. This decision potentially signals developments regarding the Sep 15 party congress litigation. The CBT's MPC convenes immediately prior on Sep 11, creating challenging decision-making conditions. While MPC sessions typically focus on macroeconomic fundamentals, concurrent political and institutional developments complicate policy perception, in our view. We anticipate FX demand dynamics may supersede inflation considerations in determining rate cut magnitudes through this period. On the flip side, implementing reductions below market expectations also carries substantial signalling risks and potential panic scenarios. Therefore, we think this MPC session presents considerable costs even for cautious approaches, representing a uniquely constrained policy environment for the CBT.

Summary of July rate-setting meeting

MPC rate decision in July

Quarterly Inflation Report for Q3

Monetary policy strategy for 2025

• Consumer goods and raw material exports decrease, while capital goods exports surge markedly
• Imports accelerate, widening external deficit year-to-date
• External trade balance intensifies stress on current account dynamics, combined with weak tourism revenues, in our view

The external trade deficit experienced a significant 16.7% y/y compression during August, reaching USD 4.2bn, trade ministry's preliminary statistics showed. This contraction principally reflected the disproportionate contraction in import volumes relative to export flows. Export revenues registered a marginal 0.9% y/y decline to USD 21.8bn in August. The deterioration was mainly on the back of consumer goods and raw material categories, which recorded respective contractions of 3.4% y/y and 4.3% y/y. Capital goods exports, however, demonstrated robust 11.2% y/y expansion during the reporting period. The EU sustained its commanding 41.7% market share as Turkey's predominant export recipient, with Near and Middle Eastern regions plus supplementary European markets maintaining sequential prominence. Germany preserved its leadership position among individual destination countries, succeeded by the US and the UK.

Import expenditures exhibited more substantial 3.9% y/y fall, totalling USD 26.0bn in August. Universal decline characterised all import subcategories, with raw materials demonstrating the steepest 5.8% y/y contraction, followed by consumer goods with 3.4% y/y decline and capital goods with 2.9% y/y reduction.

Cumulatively, the Jan-Aug period witnessed 9.6% y/y trade deficit expansion to USD 60.1bn, primarily driven by 5.6% y/y import growth outpacing corresponding 4.3% y/y export advancement. Annualised calculations revealed the trade deficit achieving 11.3% y/y escalation, culminating at USD 87.5bn. Overall, we think Turkey keeps confronting persistent structural trade imbalances despite monthly improvements, as import velocity consistently outpaces export momentum, indicating robust domestic consumption patterns. Given the underwhelming tourism performance relative to projections, this dynamic will generate additional pressure on the current account balance, we caution.

• Election to mark best gauge of voter preferences under Milei yet, at least until Oct 26 midterms
• Market looks to get ahead, a decisive outcome could trigger big shifts for asset prices
• LLA winning or losing to Peronists by 2pps would be a good outcome and assets would rise
• Peronists winning by 6pps or more could trigger panic, a contrarian could still dream
• In-between outcome would be hard to extrapolate

The Province of Buenos Aires will be holding an election for the local Congress on Sep 7 where the main contenders will be the ruling Freedom Advances (LLA) and the Peronists. Even though the Buenos Aires legislature doesn't really matter for national politics and economics, the outcome could still have huge political and market implications.

Electoral framework and competitors

This is an election for the seats in the legislature of the Province of Buenos Aires. The election takes place in eight different districts with different population totals. For our purposes, it is fair to say that only the aggregate vote share for each of the main alliances matters, and the district differences can be ignored.

There will be three main alliances. LLA competes with its usual name and banner in every district, even though it competes alongside Republican Proposal (PRO). The top Peronists all compete together in an alliance named Homeland Power (Fuerza Patria). Then there is one alliance formed by a mix of centrist and center-left parties with a Buenos Aires base that goes with the name We Are Buenos Aires. This last coalition will not be near the top two, but its vote share could be telling about the share of voters that is looking to get out of the polarization established by the LLA-Peronism fight.

The average Province of Buenos Aires voter has always leaned toward Peronism more than the national voter. In the 2023 presidential runoff, Milei had 55.65% of the national vote and 49.24% of the Province of Buenos Aires vote.

Why this local election matters

There are two related reasons why this local election is being treated as a big deal.

First, it is because when it comes to gauging voter support for national parties, we are pretty much flying blind. The standard of polling in Argentina is beyond terrible, so a local election in the province that holds nearly 40% of the population will be by far the best gauge of voter party preferences we will have received since the start of the Milei government. It will not necessarily be a great gauge of voter preferences, as we will discuss in the next section, but it can still prove decisive.

Second, the market reaction to what is considered the negative electoral outcome is significantly more extreme for Argentina than for its EM peers. The moment there is enough evidence suggesting that the Peronist opposition is likely to return to power in 2027, the market tanks. When the Peronists decisively won a 2019 presidential primary that was expected to be close, the stock market plummeted 50% the next day. The reaction to this election will not go that far if the outcome is negative for LLA, but it could still be a very harsh hit.

We could sum the situation up like this: what ultimately matters is whether Javier Milei or another pro-markets politician gets elected president in 2027. We are far from 2027, but there is a game theory problem here, because the market getting scared today about the Peronists winning in 2027 can create a self-fulfilling prophecy through negative dynamics in financial markets. There is high uncertainty about the state of national support for the government and for Peronism, this election will clear that uncertainty a little, and if the balance looks tilted to either side, there will be a strong market reaction.

These above elements explain why the market has been so defensive in recent weeks. We are heading into this election with a lot of uncertainty about the outcome, and there is a big asymmetry in the expected market reaction to the two main decisive outcomes. Even if one believes LLA is more likely to have a good performance than the Peronists, the upside of a good election for LLA is more limited than the downside of a strong Peronist election. Or at least this was the case before the market got defensive over the past week or two.

There were local elections in many other provinces, and on balance LLA did good but not great, while the Peronists performed rather badly. However, these provinces were all significantly smaller than Buenos Aires, and their outcomes also can't be directly extrapolated to the national race due to the presence of strong incumbency effects favoring regional parties. Also, all but one of these elections took place before the latest bribery scandal and economic tensions, so voter support may have changed.

Why the outcome will be hard to read

There will be a few elements making the election outcome hard to read, so the market reaction to a given outcome may not be obvious or unidirectional, especially if one of the middle outcomes materializes (more on this below).

This is the first time that Buenos Aires has these local elections separate from national elections, so it will be very hard to adjust for turnout differences and incumbency effect differences. This could really matter. For example, turnout is likely to be significantly lower than usual for Buenos Aires elections, because there is usually more apathy for lesser elections and because many people will not even be aware they need to vote. Most would argue that this benefits the Peronists to some degree, since they have stronger grassroots movements, finances, and logistics to shepherd voters to the polls than the ruling Freedom Advances (LLA). However, nobody can say with any confidence to what degree this effect could help the Peronists, if the effect exists at all.

Even if we ignored the effects of turnout and this being a low-impact election for the regular voter, the way to extrapolate the outcome to the national race still isn't obvious. For example, some analysts looked into the history of midterm elections and found that the ruling party or coalition usually won in Buenos Aires when it had national support in the 40%-45% range, so the implication that matters for our purpose would be that if the Buenos Aires election is close, national polls seeing LLA at 40% and Peronists at 30% would be validated. However, the best of these national polls comes from AtlasIntel, which shows LLA at 40% and the Peronists at 33% at the national level, but LLA losing 37% to 44% in Buenos Aires.

Thus, while it is clear that LLA tying or winning is a clear good outcome for the ruling party, the benchmark for what constitutes a bad election isn't as clear. Some would say LLA losing by 4pps is a bad outcome. Others could take AtlasIntel and be comfortable betting on LLA winning big in the national midterms, even if it loses in Buenos Aires by 7pps.

What the polls are saying

The polls about the Buenos Aires election collected by the local press are saying this election is a virtual tie or LLA losses to the Peronists by 2pps. None of the pollsters are sharing their polls in full, it's usually just a snapshot or the polling firm head saying the outcome in an interview. The similar results found across pollsters suggests there is a lot of herding toward the media consensus.

We share these results because there is always interest, but we believe the local polls should be dismissed entirely. The local market certainly does the same given the way asset prices have been behaving. We believe the bad reputation of the local pollsters is so well deserved that even if their reported outcome hits, we would still take it more as a win for the political analysts trying to gauge the election based on fundamentals and sentiment than a win for the pollsters who are clearly herding toward this analyst consensus.

Possible outcomes and consequences

LLA wins by 2pps or more, gets at least 40%: This outcome leaves little doubt that LLA likely wins the midterm elections in a fairly dominant fashion, so it triggers a strong positive market reaction across asset classes.

Election is a tie or either side wins by 2pps: This would be considered a strong election for the libertarians that would be consistent with LLA (+PRO) winning the national midterms 45% to 35% for Peronism. Even if this is what the polls say and is probably the outcome a good share of the market expects, we would still see a significant positive reaction due to the market getting defensive in the lead up to balance the upside/downside asymmetry of the election.

Peronists win by 3pps-5pps: There will be no strong consensus in interpreting an outcome in this range.

The optimist view would be that an outcome in this range can still be consistent with LLA having a good enough performance to be the top-voted party in the national midterms. Even if support for pro-market parties will probably end up having declined compared to the 2023 election, this would not be terrible given that the most difficult part of the macro stabilization would be behind and that LLA would do well just well enough in the midterms to sustain governability.

The pessimist view would be that now it isn't as clear that LLA + PRO will win the midterms, and that it becomes a lot more likely there will be a weakened presidential mandate for the second half of the government. This would bring a whole new set of problems for the government to deal with, which ultimately makes it all that much harder for Milei to get reelected.

Peronists win by 6pps-8pps: Some analysts say the market is pricing this bad of an outcome, but we don't think this is the case and would expect a negative market reaction. There would still be room for an optimist or a contrarian to dream about a reversal in October, thanks to the AtlasIntel poll and all the elements that make this election very different from the October midterms.

Milei says there is a "technical tie" in Buenos Aires Province, defends Karina and again denounces opposition "smear campaigns" (Infobae)

Heavily guarded rally: Milei closes LLA campaign, defends Karina and claims "technical tie" in Buenos Aires Province (La Nación)

US reportedly pauses agreement for Argentines to travel without a visa (Infobae)

Economy Ministry on dollar sales and outlook for weeks ahead (Infobae)

Market surprise: government says it bought dollars to ease exchange rate tensions (La Nación)

Government blames "a Chinese bank" for Monday's dollar surge (Clarin)

All in for the surplus: government kept gas subsidies but built up USD 500mn debt with oil companies (Clarin)

Automotive production falls for second consecutive month (Clarin)

• Quirno says "bank of Chinese origin" caused exchange rate to depreciate USD/ARS 40 with just USD 30mn order
• Comment meant as justification for Treasury's decision to sell USD in spot market
• Economy team is either seeing ghosts or shamelessly trying to deflect blame

Finance Secretary Pablo Quirno defended the Treasury's decision to intervene in the spot FX market to "plug liquidity gaps" as part of the actions to fight against premeditated actions by the opposition to try to destabilize the government, according to quotes published by the daily Clarin from an interview with the TV channel A24. As an example of the attempts to destabilize, Quirno said a bank of Chinese origin (ICBC) depreciated the exchange rate by USD/ARS 40 with just a USD 30mn order in the spot market. Quirno said the announced intervention of the spot FX market is not to defend a given exchange rate, but to ensure that there is enough liquidity so that nobody can significantly move the exchange rate with a small order, whether by mistake or intentionally.

Overall, these comments by Quirno are very concerning because he confirms that the economy team is seeing ghosts. The economy team unexpectedly changed FX balance rules for banks last Friday for the sole purpose of paralyzing their FX transactions for a day, knowing banks needed to increase their USD cash position. Those transactions that were blocked last Friday banks carried out Monday, and this is surely what explains the movements that now Quirno says were an attempt to destabilize.

A good election performance by the ruling Freedom Advances (LLA) will solve a lot of the problems we are seeing in financial markets, but we are getting increasingly convinced that the current economy team may not the right one for the next step of the macro stabilization phase. The next step requires an orthodox approach to exchange rate and monetary policy that prioritizes the rebuild of external buffers and doesn't place deterrents to the development of the tradable side of the economy, which seems beyond the capabilities of the current team that grew obsessed with sustaining a strong exchange rate and always shunned the option of a macroprudential policy approach.

• Furiase says macro program fundamentals remain solid, political noise is the problem
• Furiase says Treasury's spot market intervention warranted due to illiquidity
• Furiase's arguments are weak all around, current FX scheme can only survive with a strong LLA election

BCRA Director Federico Furiase said the tension seen in recent days in financial markets is tied entirely to political noise, but the fundamentals of the government's macro program remain solid and there are no reasons to change the FX or monetary regimes, according to a TV interview with LN+. Furiase said the Treasury's decision to intervene in the spot FX market was warranted because the political noise creates situations of market illiquidity, so the exchange rate has been depreciating sharply with little volume.

Furiase also argued that the currency band regime remains intact because the rules apply to the BCRA and have not been changed. Asked directly if the FX regime will change after the Oct 26 midterm elections, Furiase said "the currency float bands remain the same".

Overall, while we don't doubt that the political noise explains a lot of the market turmoil, there have been clear signs that the market was seeing problems with the FX and monetary regimes since June. The argument for the Treasury's spot market intervention also rings hollow because market volume has not been low, and Furiase is also kind of treating the intervention as if this is something new, when in reality the government has been heavily trying to influence the spot price for three months. As for the FX scheme not changing after the October election, that can only happen if the ruling Freedom Advances (LLA) has a strong performance. If it doesn't, the market will force a change because the government doesn't have the resources to defend a bad currency band.

Market views Centrão's bill to dismiss BCB directors as 'blackmail' and 'empty threat' (Valor Econômico)

Haddad says he is concerned about possibility of Congress being able to dismiss BCB directors (Poder360)

Treasury issues USD 2.5bn in USD-denominated bonds (UOL)

Defense for Bolsonaro denies coup, criticizes plea bargain, and says Bolsonaro 'was dragged down' to 8/1 (UOL)

Lula invites [Senate leader] Alcolumbre and ministers from União Brasil to lunch at Alvorada (G1)

[Senate leader] Alcolumbre rejects amnesty for Bolsonaro and says he will vote for alternative text (Folha de São Paulo)

Federal Supreme Court justices predict amnesty for Bolsonaro would be unconstitutional if it moves forward in Congress (O Globo)

Senate approves constitutional amendment changing rules on court-ordered debt payments [our story about this here] (Agência Brasil)

Haddad criticizes [SP's] Tarcísio's statement that he does not trust the justice system and says he is concerned about democracy (Terra)

• Treasury says it placed USD 2.50bn 30-year bond and retapped 5-year bond for USD 750mn
• Treasury says risk premium on 30-year bonds was the lowest since 2014

The Brazilian National Treasury announced it raised USD 3.25bn through a USD-denominated bond issuance on the international market, according to a statement released Wed. The Treasury issued USD 2.50bn in 30-year bonds (Global 2056) with a yield of 7.50%, representing a spread of 252.7bps over the benchmark US Treasury. It highlighted that the risk premium fell to its lowest level since 2014. The total amount of the 2056 notes includes about USD 1.7bn allocated to finance the repurchase of older Brazilian bonds, the Treasury noted.

The Treasury also issued USD 750mn in 5-year bonds (Global 2030), marking a 50% increase over the original issue, bringing the total outstanding to USD 2.25bn. The yield here was 5.20%, generating a spread of 146.4bps over the respective US Treasury. The Treasury stressed that the operation drew significant investor demand, particularly from Europe and North America, which together accounted for 90% of buyers.

Overall, the Treasury emphasized that the bonds were issued at rates close to those of investment-grade countries and attracted broad investor interest, reinforcing Brazil's market appeal. It added that the operation reaffirms the importance of external debt as a tool for lengthening the average maturity of public debt and for diversifying and expanding the investor base.

• Sales fall in Aug following 0.8% y/y increase in Jul
• Sales decline 7.4% m/m in Aug after a strong 14.2% increase the month before

Total automotive sales, excluding motorcycles, fell by 5.1% y/y to 225,348 units in August, following a 0.8% increase the month before, according to data released Wed. by the National Automotive Vehicle Distribution Federation (Fenabrave). On a monthly basis, sales fell 7.4% m/m after a strong 14.2% increase in July. Fenabrave attributed the decline to fewer working days in August compared to July. In Jan-Aug, automotive sales rose by 2.8% y/y to 1.6mn units.

Data Download

Passenger cars, which accounted for 76.5% of all August sales (up from 74.4% in July), were the only subsector to grow in the month, rising by 0.8% y/y to mark the second consecutive yearly increase. Light commercial vehicle (LCVs) sales fell a sharp 19.1% y/y in August, following a 2.1% decline the month before, and bus sales dropped 28.8%, marking the second consecutive decline after a 13-month run of gains. Truck sales fell 22.1% y/y, marking the sixth consecutive decline.

Overall, automotive sales resumed their downward trend after an increase in July, extending a six-month streak of mixed signals. Despite the decline, Fenabrave remains optimistic and maintained its forecast for this year's sales at 2.8mn units, which would mark a 5.0% y/y increase. However, Fenabrave noted that the ongoing economic deceleration and lower credit availability due to a restrictive monetary policy could weigh on the sector.

• PMI increase completely reverses decline posted in July
• But PMI remains below 50-pt neutral mark for fifth consecutive month

The S&P Global Services Business Activity Index for Brazil rose 3.0pts m/m to 49.3pts in August from 46.3pts in July, fully reversing the decline posted the month before, according to data released Wed. by the S&P. This was the first increase in three months, though the index has now remained below the 50-point neutral threshold for five consecutive months. S&P attributed the improvement to a more moderate decline in new business volumes, reflecting softer demand. However, weaker activity continued to affect employment, which fell at its fastest pace in four and a half years. Firms also noted that fierce competition weighed on sales.

Data Download

Input costs rose at a faster pace than output prices, driven by a high tax burden, supplier price adjustments, unfavorable exchange rates, and union agreements. Companies were unable to fully pass these costs on to consumers as competition in several service sectors limited price increases. Meanwhile, business confidence improved in August compared with July, though it remained below historical averages. Firms expect a rebound in demand, new investments, and legislative changes to support the sector, likely from the anticipated boost in disposable income from the income tax reform.

Overall, the services PMI has remained below the neutral mark for five months, signaling contraction in the sector under the weight of the BCB's restrictive monetary policy. Still, resilience persisted in Q2 2025, supported by a robust labor market, real wage gains, and government fiscal measures, which also helped the services sector lead the quarterly economic growth. This resilience underscores the BCB's assessment that services inflation remains above a level consistent with the 3.0% inflation target, reinforcing the need for a tight monetary policy. As the Copom is expected to hold the Selic rate at 15.00% at least through year-end, the services sector is likely to continue facing headwinds, though government actions may help cushion the blow.

• Industrial output rise of 0.2% y/y in Jul recovers from 1.3% decline in June but just misses 0.3% consensus expectation
• Industrial output falls 0.2% m/m following revised stability the month before
• Industrial output rises 1.1% y/y in Jan-Jul

Industrial output in Brazil rose a slight 0.2% y/y in July, swinging back to positive territory after a 1.3% decline the month before, but missing the consensus expectation for a 0.3% increase, according to data released Wed. by the stats office IBGE. There was no change in working days from last year. Mining output rose by 6.3% y/y in July, accelerating from 3.9% the previous month, while manufacturing fell by 0.9% in July to mark the second consecutive decline. Industrial output rose 1.1% y/y in Jan-Jul.

Data Download

Some 12 of the 25 activities monitored recorded y/y increases in July. The largest upward contribution came from the extractive sector, driven by oil and natural gas production. Food, pharmaceuticals, machinery and equipment, chemicals, textiles, and pulp also contributed to growth. On the other hand, coke and oil refining had the largest negative impact, with beverages, printing, metal products, and electrical materials also weighing on the index.

In terms of categories, consumer goods posted the sharpest y/y decline once again, falling 4.0% y/y in July after a revised 7.3% drop the month before to mark the second consecutive decline after the May revision to stability. Capital goods (-0.1% y/y) and durable goods (-3.4%) also fell y/y in July. On the positive side, intermediate goods grew 2.5% y/y, marking the fifth consecutive increase, and non-durable goods also rose 2.5%.

On a monthly basis, industrial output fell 0.2% m/m in July after revised stability in June, marking the fourth consecutive month without growth.

Overall, industrial production continues to feel the effects of monetary tightening, which is expected to further weigh on the sector throughout H2 2025. In Q2 2025, the industrial sector expanded 0.5% q/q and 1.1% y/y, pointing to still-resilient activity. The July print may already reflect the partial impact from the higher US tariffs announced on Jul 9, which affected expectations. However, the extent of the tariff impact and the relevance of the government's contingency plan will become clearer in the coming releases. With the July production print, the BCB is likely to stick to its guidance and hold the Selic at 15.00% at its September policy meeting, as it waits for further confirmation of the economic slowdown and for inflation expectations to converge toward the 3.0% target.

Question:

Are there any other parties/legislators that have voiced their support for the bill?

The question was asked in relation to the following story: Centrão legislators attempt to push bill that allows dismissal of BCB directors

Answer:

So far, the urgency request has been signed by the leaders of the main Centrão parties: the Progressive Party (PP), União Brasil, Liberal Party (PL), Brazilian Socialist Party (PSB), Republicans, and the Brazilian Democratic Movement (MDB). As the Centrão represents a large share of Congress, these signatures together account for more than 300 lawmakers - above the 257 needed to approve the urgency regime. Meanwhile, former BCB members have been criticizing the measure in the press.

Chamber of Deputies Speaker Hugo Motta has not yet publicly indicated his position on the measure, though there are some behind-the-scenes conversations suggesting he could move the issue forward. However, approval of the urgency request does not necessarily mean the bill will be voted on in the coming weeks, as political maneuvering could still hinder its progress. We note that this development came as a surprise, particularly since the same lawmakers had recently been trying to advance the BCB's financial autonomy bill.

• União Brasil and PP announce departure from Lula's government and their ministers are expected to resign within 30 days
• Parties signal support for amnesty of those convicted for Jan 8, 2023, events, including former President Bolsonaro
• Parties indicate intention to back SP's Tarcísio de Freitas in the 2026 presidential race

President Luiz Inácio Lula da Silva's government lost support in Congress on Tues. after União Brasil and the Progressive Party (PP) -- which together form the União Progressista federation -- announced their departure from the administration. Following the decision, the ministers of sport and tourism are expected to step down within 30 days or risk sanctions from the federation. The parties also expressed support for a bill granting amnesty to those convicted for the Jan 8, 2023, riots, including former President Jair Bolsonaro, who is currently being tried for the events at the Federal Supreme Court (STF). In addition, both parties signaled their intention to support São Paulo Governor Tarcísio de Freitas's potential presidential bid in the 2026 election.

Overall, the Centrão parties' withdrawal from Lula's base comes amid his fragile popularity, Bolsonaro's ongoing trial at the Supreme Court, and an acceleration of political maneuvering ahead of the 2026 elections. In our view, the decision was heavily influenced by expectations that Tarcísio will emerge as the right-wing candidate in 2026, though this remains uncertain given internal disputes within the Bolsonaro family. Opposition lawmakers appear convinced that Lula will lose to a right-wing candidate in 2026, a scenario we do not consider a given. In Congress, the departure will weaken Lula's support for advancing key legislation, particularly on revenue-raising measures aimed at fiscal balance. Moreover, it increases the risk of changes to the compensation mechanism in the income tax reform designed to ensure fiscal neutrality, which in our view heightens fiscal risks. While passage of the reform itself appears likely, the details of its compensation remain uncertain.

• Bill would allow Congress to dismiss BCB directors if their actions do not comply with 'national interests'
• Bill's approval would represent a setback to the autonomy granted to the BCB in 2021

Centrão legislators signed Tues. a request for an urgent analysis of a bill that would allow Brazil's Congress to dismiss BCB directors. The proposal establishes that BCB directors could be removed by an absolute majority vote of both the Chamber of Deputies and the Federal Senate if their actions were deemed "incompatible with national interests" without due cause. The urgency request, which would accelerate the bill's proceedings in Congress, still needs approval in the lower house before the proposal itself can be analyzed and subsequently sent to the Senate.

Overall, approval of this bill would clearly represent a setback to the autonomy granted to the BCB in 2021. Beyond establishing the possibility of dismissal based on vague and subjective criteria, such a measure could prove dangerous in election years when the BCB's monetary policy stance runs counter to fiscal expansionism, or in scenarios where Congress applies pressure against the executive, undermining the credibility of national economic policy. The bill must still undergo a long legislative process before approval and is being pushed in a context in which the BCB is assessing the acquisition of one bank by another, involving congressional interests. We remain skeptical about the bill's chance of success, but it could nevertheless have significant negative effects on the country's credibility.

MORENA-linked justices will preside the courts in 11 states; PAN and PRI place amicable judges in the states they govern (Animal Político)

Banxico is worried about core inflation (El Norte)

Govt imposes compensatory quotas on shoe imports from China (El Economista)

Trump says Sheinbaum does not accept his help [in fighting drug cartels] because she is afraid (La Jornada)

Mexico and the US agree on a border security plan (Reforma)

Agreement on security and migration with respect to the country's sovereignty ends the Sheinbaum-Rubio meeting (La Jornada)

Marco Rubio says bilateral cooperation has reached a historic level, after meeting with Sheinbaum (El Sol de México)

The times Marco Rubio criticized ex-Pres López (El Financiero)

Mexico and the US agree on immediate actions vs the cartels, fuel and weapons' traffic; they create a high-level team to fight them (Milenio)

Marco Rubio confirms a war on drug-related terrorist groups, recognizes Mexico's fight on the cartels (El Universal)

These are MORENA's women that might seek the presidency (Político)

Fuel retailers extend the upper limit to the price of regular fuel at MXN 24 per liter (Expansión)

Why are consumers optimists about their money but pessimists about the economy? (El Economista)

Govt prohibits the use of 35 'highly dangerous' pesticides (La Razón)

• Announcement disappoints vs security agreement expectations, in our view
• But the announcement shows a step forward nevertheless, with Mexico ceding in key requests made by the Trump administration

The government agreed to establish a high-level team to fight illegal migration and drug traffic, the Claudia Sheinbaum administration announced on Wednesday. Pres Sheinbaum said no accord was signed, but the establishment of the traffic-fighting team represents an update of a security understanding.

Overall, we see this as a disappointing development vs the hopes of a security agreement being signed during the visit of US State Minister Marco Rubio. Indeed, Pres Sheinbaum had fueled the hopes of a security agreement being signed, which we expected to shield the country from any new tariffs from the US administration. Still, the decision to build a bilateral team to fight drug traffic does show a step forward in the bilateral relationship, showing the Sheinbaum administration willing to cede to the pressure made by the Donald Trump administration to fight fentanyl traffic and illegal migration.

• Says only a "very clear" downward trend would open the room to further easing
• But Heath is in the minority, the bulk of the board is willing to ease further, in our view

The CB's inflation forecast is "almost naive", CB Deputy Governor Jonathan Heath said on Wednesday, as quoted by Bloomberg. The criticism isn't too surprising to us, considering the deputy governor has been a critic of the dovish stance taken by the bulk of the Monetary Policy Council (MPC), breaking with the majority in the August sitting, with Heath being the only board member voting against further monetary easing.

Heath noted the divergence between core and non-core inflation in criticizing the CB's inflationary forecast, noting non-core inflation tends to be very volatile. Indeed, the bulk of July's disinflation came on the back of non-core inflation, mostly driven by fruit and vegetables and energy prices. Indeed, this is likely to be transitory, with core inflation standing at 4.23% y/y in July, adding three months above 4.00% and showing upward pressure from some components.

Deputy Governor Heath says only a "very clear" disinflation trend in the coming months could justify further easing. However, the CB should hold its policy rate if current conditions hold.

Overall, we fully agree with the deputy governor's criticism of the CB's inflation forecast. Indeed, the belief that CPI inflation will fall to 3.00% by Q3 2026 is way off from the market's projection and doesn't seem like a serious projection at this point. However, we are confident Heath is in the minority, with the bulk of the board looking to cut its policy rate in September and, probably, in November, even if CPI inflation remains at its current level and mid-term expectations fail to cede.

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

The CB raised its 2025 GDP growth forecast last week, without updating its year-end CPI inflation forecast. The CB lifted its 2026 GDP growth forecast too, to 1.1%. This is relevant considering some board members had predicted disinflation would come in the mid-term thanks to weakening growth, with some highlighting a risk of a recession. However, revising 2025 growth expectations up from a punctual projection of 0.1% growth to one of 0.6% did not push any board members of warn that this better-than-anticipated performance would pressure CPI inflation up and should thus have the Monetary Policy Rate (MPR) close the year a bit above their previous prediction.

Data Download

We remind that the latest sitting minute shows the CB is willing to bring its MPR below 7.50% before year-end, in our view. Three board members see further cuts, in plural, without discussing a pause ahead, suggesting they see easing in the next two sittings, in our view. This strengthens our expectation that the MPR will close the year at 7.25%, a bit below market consensus.

The quarterly report presentation made on Friday did not alter our thinking, with the Monetary Policy Council (MPC) failing to give any further forward guidance, in our view.

The minute confirmed, unsurprisingly, Deputy Governor Jonathan Heath is set to oppose any easing ahead, and shows another member, probably Deputy Governor Galia Borja, looking to pause the easing cycle ahead. Thus, a September 25bps MPR cut could come from a 3-2 vote, particularly if CPI inflation disappoints. Although we currently predict the cut will come from a 4-1 vote, with Borja siding with the dovish majority (again, unless CPI inflation disappoints). A 3-2 vote is more likely in November, in our view, considering Borja seems to believe a pause is necessary relatively soon and considering the dovish board of the Monetary Policy Council (MPC) seems all too willing to continue the easing cycle despite lingering inflationary pressures.

Borja gave no insight into her reasoning on Friday, only saying future policy decisions will follow the available data.

Failure to discuss a pause to the easing cycle in November would be surprising to us, anticipating another 25bps cut in December. However, given the dovish position assumed by the board, we don't believe such stance is out of the question.

We are not surprised to see Governor Victoria Rodríguez and Deputy Governor Omar Mejía maintain such a dovish stance at the CB's board, given their previous rhetoric. Indeed, Governor Rodríguez claimed last week that CPI inflation is converging to the CB's 3.00% target, without clear evidence for this and without the market expectations on her side. On his side, Deputy Governor Mejía continues to insist the mid-term inflationary outlook is mixed, pressured down by a weak mid-term growth outlook, despite the potential deceleration having yet any impact on prices.

We are surprised to see Deputy Governor José Gabriel Cuadra taking such a dovish position, believing he was more technical than Governor Rodríguez and Deputy Governor Mejía. Still it will be interesting to see if he takes a less dovish position in the September sitting, considering he is more likely to abandon the dovish side of the board than the CB's governor and Mejía, in our view, considering they might be more influenced by the MORENA regime.

Recent CPI inflation data are unlikely to sway the CB's board away from its current easing trend, in our view. CPI inflation did accelerate a bit in August H1, to 3.49% y/y, while core inflation remained high at 4.21% y/y. However, the MPC seems all too willing to tolerate lingering inflationary pressure, and the fact that core inflation does not anticipate general inflation is about to converge to the CB's 3.00% target. Indeed, despite this performance, the CB continues to predict CPI inflation will converge to its punctual target by Q3 2026, something not anticipated by the market, with analysts expecting CPI inflation to remain above 3.70% both by 2026-end and until the end of 2027.

Despite this lingering adversity, the dovish side of the MPC notes the currency has remained strong and growth is looking weak, expecting both of these factors to contribute to disinflation ahead, despite their failure to show any significant impact yet that might suggest CPI inflation will converge to the CB's target.

Overall, we expect the CB will cut its policy rate by 25bps in September, bringing down the policy rate to 7.50% by Q3-end. We are confident the easing will come from a divided board. We expect the CB will vote for another 25bps cut in November. When a new divided vote is likely. Likely monetary easing by the Federal Reserve strengthens our expectation that the MPR will close the year at 7.25 or 7.00%, given the dovish position assumed by the bulk of the board. However, its final position might end up depending on CPI inflation, as lingering pressure might have the CB's board pause the cycle in at least one sitting, closing the year with the policy rate at 7.25%.

Egypt's chemical exports reach USD 5.3bn in seven months (Sada Elbalad English)

Egypt welcomes Belgium's plans to recognize Palestinian state (Egypt Today)

Egypt, Bahrain forge stronger ties with 8 new MoUs (Egypt Today)

Egypt secures 9th global spot leads Africa in attracting foreign investments (Egypt Today)

More than 53mn Egyptians now have active financial accounts (Egypt Today)

• Bahraini investments in Egypt are valued at USD 450mn

Non-oil trade between Egypt and Bahrain reached USD 460.5mn in 2024, with Bahraini investments in Egypt valued at USD 450mn in 2024, according to the Emirates News Agency (WAM).

Here is additional information about the economic relations between the two countries:

In 2025, Egypt and Bahrain signed a series of trade and cooperation agreements across more than 10 sectors during a high-level visit by Bahrain's Crown Prince to Egypt. The agreements include:

• MoU between Aluminium Bahrain (ALBA) and Egyptalum to explore building an alumina refinery in Egypt
  
• MoU on investment cooperation between Bahrain Economic Development Board and Egypt's General Authority for Investment and Free Zones
  
• Strategic cooperation MoU between Bahrain International Exhibitions Center and Egypt's General Authority for Exhibitions and Conferences
  
• Mutual recognition agreement on the Authorized Economic Operator program for customs cooperation
  
• MoU on tourism collaboration between the Ministries of Tourism in Bahrain and Egypt
  
• MoU between Bahrain Authority for Culture and Antiquities and Egypt's Ministry of Tourism and Antiquities on cultural heritage
  
• MoU on cooperation in competition protection
  
• Technical cooperation and capacity building MoU on sustainable development
  
• MoU between the Ministries of Labor in Bahrain and Egypt on labor and human resources
  
• MoU to establish a joint urban planning council
  
• MoU to establish a Bahraini-Egyptian youth council
  
• MoU inviting Egyptian companies to participate in Bahrain's government land development projects
  
• MoU on social insurance and pensions
  
• MoU on cooperation in social development

It should be noted that Egypt and Bahrain are very different countries.

Egypt's population is 117mn, while Bahrain has just 1.5mn people. Similarly, Egypt's GDP is USD 350bn, while Bahrain's GDP is USD 48bn. However, Bahrain is considerably wealthier when comparing GDP per capita and average salaries.

• European Commission to decide by Dec 2 whether to allow deal

EU antitrust regulators are set to pause their investigation into the Abu Dhabi National Oil Company (ADNOC) proposed EUR 14.7bn (USD 17.1bn) purchase of German chemicals company Covestro, according to Reuters. The temporary halt will give the European Commission more time to gather information on the deal.

The European Commission is the executive arm of the European Union and is politically independent and responsible for proposing new European legislation. The European Commission said on July 28 that it has preliminary concerns about whether state-owned ADNOC and Covestro might receive foreign subsidies distorting the EU market.

ADNOC agreed to buy Covestro in 2024. The European Commission opened an investigationinto the deal in July, citing concerns about subsidies granted by the UAE, including an unlimited guarantee as well as a committed capital increase by ADNOC into Covestro.

The European Commission has set a Dec 2 deadline for its decision whether it will allow the deal to proceed.

• Funds target 764,205 vulnerable people in the Northeast and Northwest regions
• Earlier in 2025, WFP warned of suspending aid due to USD 130mn funding shortfall

The United States government committed USD 32.5mn to the United Nations World Food Programme (WFP) to provide food and nutrition assistance for people affected by conflict in Nigeria. According to a statement from the US embassy in Abuja on Wednesday (Sep 3), the funds will allow the WFP to support about 764,205 vulnerable individuals in the Northeast and Northwest, which are regions heavily impacted by insecurity and displacement. Earlier in the year, the WFP had warned that it would have to suspend emergency food and nutrition aid for 1.3 million people in Northeast Nigeria due to a USD 130mn funding shortfall.

The US embassy said this USD 32.5mn intervention builds on its broader support for Nigeria's food security over the years. The funding will cover general food distributions and targeted nutritional support that includes electronic food vouchers for 41,569 pregnant and breastfeeding women and girls as well as 43,235 children. Nearly 31 million people across the country are facing acute food insecurity, with over 300,000 children at risk of severe malnutrition.

• Revenue rose 40.5% y/y to NGN 20.59tn between Jan and Aug 2025
• Non-oil inflows contributed NGN 15.69tn to the total
• Presidency described this as a clear shift away from crude oil dependency

According to a statement from the presidency on Wednesday (Sep 3), government revenue rose sharply in 2025 and was driven mainly by non-oil inflows. Between January and August, total collections reached NGN 20.59tn which is a 40.5% increase compared with NGN 14.6tn during the same period in 2024. Non-oil revenue accounted for NGN 15.69tn, representing 76% of the total. Presidential spokesperson Bayo Onanuga said this shows a clear shift away from crude oil dependence. He described the revenue trend as a "watershed moment" and attributed the gains to reforms, compliance improvements and digitisation.

The presidency denied claims that government is overstating revenue achievements. On Tuesday, Tinubu had said Nigeria already met its 2025 revenue target ahead of schedule and is no longer borrowing from local banks to fund the budget. The presidency's statement on Wednesday clarified that overall revenue collections are ahead of pro-rata expectations but final validation of the 2025 performance will be provided by the Budget Office at year-end. We note that the government has received criticism for failing to publish budget progress reports throughout the year, instead choosing to rely on press briefings and statements.

Customs and tax agencies also surpassed targets according to the statement, with the Nigeria Customs Service collecting NGN 3.68tn in the first half of the year. The agency surpassed its target by NGN 390bn due to automation and tighter enforcement. The presidency also highlighted a spillover effect at state and local government levels, where allocations crossed NGN 2tn for the first time in July which gave subnational governments more resources for infrastructure and social services. Oil revenues remain weak due to low crude prices and unmet production targets but the presidency said the priority now is to channel non-oil gains into real benefits for Nigerians through jobs and food security.

Non-oil revenue jumps 40% to N20.6tn - Presidency (Punch)

My reforms have restored Nigeria's global respect - Tinubu (Punch)

Security concerns behind visa cancellations for Nigerians, others - US (Punch)

Insecurity: Tinubu Pushes for State Police, Hails Civilian JTF (ThisDay)

Tinubu Orders SGF To Issue Circular On Health Insurance In MDAs (ThisDay)

Nigeria, Poland Deepen Trade Ties With Inaugural Economic Forum In Lagos (ThisDay)

FG, nurses union reach fresh agreement on service scheme, reserve 60% job quota (Nairametrics)

Standard Bank revises Naira outlook, projects N1,585.5/$1 by end of 2025 (Nairametrics)

US commits $32.5m to support food security in Nigeria (Nairametrics)

• Regulations ban automatic lending and abusive recovery practices
• Rules impose sanctions of up to NGN 100mn for non-compliant lenders
• They apply to all unsecured consumer lending via electronic and online platforms

The Federal Competition and Consumer Protection Commission (FCCPC) launched a new set of regulations on Wednesday (Sep 3) to curb widespread abuses in Nigeria's digital lending sector. The 2025 Digital, Electronic, Online or Non-Traditional Consumer Lending Regulations introduces strict oversight of Nigeria's fast-growing digital lending industry, with sanctions of up to NGN 100mn or 1% of turnover for non-compliant operators. The regulations apply to all unsecured consumer lending through electronic, online, mobile or other non-traditional platforms. The move comes after widespread complaints from Nigerians about harassment, privacy breaches, abusive loan recovery practices and exploitative interest rates associated with unregulated digital lenders.

The FCCPC said the new rules aim to protect consumer rights while ensuring fair and responsible lending practices. According to FCCPC executive vice chairman Tunji Bello, the regulations clearly distinguish between innovation and consumer exploitation. The framework requires lenders to register with the FCCPC and adhere to transparent loan terms. It also bans automatic lending and sets rules on data privacy and fair interest rates. Directors of offending firms may face disqualification of up to five years.

• Foreign inflows fell by 30.7% m/m, foreign outflows increased by 43.6%
• Total market turnover rose by 133% m/m to NGN 1.8tn
• Domestic investors drove most of market activity due to block trades

Net offshore portfolio flows into Nigerian equity recorded a deficit (net outflow) in July of NGN 44.99bn (USD 24.9mn), according to NGX data. This is the first deficit in three months. Foreign inflows fell by 30.7% m/m, to NGN 50.5bn from NGN 72.8bn in June Foreign outflows increased to NGN 95.5bn in July from NGN 66.5bn in June, a 43.6% rise. Despite the drop in foreign inflows, overall market turnover increased by 133.1% m/m to NGN 1.8tn in July, compared with NGN 778.7bn in June. This is the NGX's highest recorded monthly trading volume. Domestic investors made up the bulk of market activity at NGN 1.67tn (91.96%), driven largely by block trades. Foreign investors accounted for NGN 145.95bn (8.04%) of equities transactions.

Data Download

Domestic transactions jumped 161.1% m/m from NGN 639.3bn while foreign transactions increased modestly by 4.8% from NGN139.31bn in July. This highlights renewed interest among Nigerians in the local stock market, particularly as they seek opportunities to grow and preserve wealth. Domestic portfolio investment showed notable fluctuations earlier in the year, starting at NGN 535.5bn in January and reaching its lowest point of NGN 415.6bn in March before resuming steady growth. Compared with foreign portfolio investment, domestic portfolio investment outperformed in every month except March. Total transaction value on the NGX reached NGN 6tn for the year-to-date as of July, up 94% from NGN 3.1tn for the same period in 2024.

• New slabs include 5% and 18%;40% for sin goods
• New taxes to be effective from September 22
• FMCG, small cars, white goods, insurance to benefits from lower rates

The GST Council on September 3 approved a landmark restructuring of the indirect tax regime, reducing the number of slabs to two-5% and 18%-while creating a special 40% rate for sin goods. The changes, which abolish the 12% and 28% rates, will come into effect on September 22, in time to boost consumption ahead of the festive season.

Finance Minister Nirmala Sitharaman said the reform is comprehensive, covering not just rate rationalisation but also process improvements to ease compliance. Relief will extend to FMCG items, most white goods, small cars and bikes, and individual life and health insurance policies. At the same time, items such as coal, high-value apparel, and e-gaming have been shifted to higher slabs to offset revenue losses.

The overhaul is estimated to cost the exchequer INR 480bn annually based on FY24 consumption, though buoyancy and better compliance are expected to narrow the gap. Official estimates suggest overall annual revenue losses could reach INR 930bn, partly balanced by additional revenues of INR 450bn from sin goods. The compensation cess will be scrapped by October-November, once loans taken by the Centre to support states in the initial GST years are repaid.

The Council also approved compliance relief measures, including faster registration for MSMEs and startups (cut to three days) and time-bound automated refunds for exporters. Correction of inverted duty structures, particularly in labour-intensive sectors, has also been incorporated.

Opposition-ruled states, including Karnataka, Kerala, Tamil Nadu, and West Bengal, reiterated demands for revenue compensation, warning of substantial losses. Kerala estimated a hit of INR 80bn annually, while Jharkhand pegged its loss at INR 20bn. The Centre has declined to extend compensation, arguing that cess collections have fulfilled earlier commitments.

The new structure simplifies GST, lowers taxes on mass-consumption items, and should provide a demand boost during a slowdown compounded by US tariff pressures. States' pushback on revenue loss foreshadows continued Centre-state tensions, which may complicate the political economy of GST 2.0 implementation.

India raises concerns over mobility, non-tariff barriers faced by Indian exporters in EU (Economic Times)

Jaishankar pushes for swift India-EU FTA (Economic Times)

Freight tax cut to drive logistics (Economic Times)

Indian exporters lobby RBI for weaker rupee to offset Trump tariffs (Business Standard)

TVs, ACs, dishwashers GST cut may brighten Diwali for consumer electronics (Business Standard)

FMCG companies to benefit as GST slashed to 5% on key daily essentials (Business Standard)

2-tier GST regime from September 22 (Financial Express)

Govt vows support to exporters amid tariff heat (Financial Express)

'India's got big problems': Trump hints at 'phase-2, phase-3' of 'sanctions' over Russian oil purchase (Times of India)

Rain-Battered States Look For Relief, But Monsoon Delays Its Withdrawal (www.ndtv.com)

• Germany hopeful of finalizing a trade deal by autumn
  
• US tariff shock has created urgency for India to conclude talks

German Foreign Minister Johann Wadephul has expressed optimism that the long-delayed EU-India free trade agreement (FTA) could be finalised as early as this autumn, well ahead of the official year-end target set by Prime Minister Narendra Modi and European Commission President Ursula von der Leyen. Formal talks began nearly two decades ago but have repeatedly stalled over disagreements on agriculture and market access.

Wadephul, speaking after talks with Indian Foreign Minister S. Jaishankar in New Delhi, said both sides should respond to rising global protectionism by lowering barriers. Jaishankar welcomed the accelerated timeline, stressing that an FTA had taken on "greater urgency" amid tariff shocks and global uncertainty.

The push comes as India faces escalating US trade pressure. Last week, Washington doubled tariffs on Indian imports to 50%, citing New Delhi's continued purchases of Russian oil. The move has added urgency to India's efforts to diversify trade ties and secure agreements with Europe and other partners.

The EU-India deal is viewed in Brussels and Berlin as not only an economic opportunity but also a geopolitical anchor. Wadephul's visit followed Modi's participation at the Shanghai Cooperation Organization summit in Tianjin, where he held a rare informal meeting with Xi Jinping and Vladimir Putin, highlighting India's centrality in balancing global alignments.

A breakthrough on the EU-India FTA would give New Delhi vital trade diversification as US tariffs squeeze exports, while strengthening Europe's strategic outreach to Asia. For both sides, the deal carries weight beyond commerce, signalling commitment to open markets and multilateralism in an era of rising geopolitical fragmentation.

Prabowo, Xi Jinping Talk $80 Billion Giant Sea Wall (Jakarta Globe)

Asset bill gains momentum following nationwide protests (The Jakarta Post)

VP Gibran tours Jakarta areas after protests to boost security (Antara News)

Apple yet to seek approval for iPhone 17 sales in Indonesia (Antara News)

OJK: Insurance Premiums to Grow Slightly to Rp194.55 Trillion by July 2025, Claims Down 5% (Bisnis)

BI Approves Burden Sharing to Fund Prabowo's Asta Cita Program; Here's the Mechanism (Kompas)

Oil Prices Plunge Ahead of OPEC+ Meeting MARKET 15 minutes ago (CNBC Indonesia)

Trump Asks Supreme Court to Overturn Import Tariff Ruling (Media Indonesia)

• Prabowo backtracks on weekend pledges to stay in Indonesia, abort trip to China
• Prabowo accepts some of protesters' demands, removing perks for public servants
• Police fires officer believed to be responsible for death of taxi driver, which led to escalation of protests

Protests in the capital Jakarta and other major cities continued on Wednesday, local media reported. Women's organisations took the lead, appearing in pink dresses and brooms in order to "swipe away the dirt". We remind that the protests started on Aug 25 and have been going on for more than a week.

Despite earlier pledges to cancel a trip to China, President Prabowo Subianto did indeed fly to China to attend a military parade for Victory Day alongside Chinese President Xi Jinping. This is likely to cause further domestic turmoil as Prabowo backtracked on his pledges over the weekend to remain in Indonesia.

At the same time, the Jakarta police fired a police officer, believed to be responsible for the death of a motorcycle taxi driver last week, which led to the escalation of the protests. President Prabowo Subianto also accepted some of the protesters' demands, such as removing perks for public servants and their lavish housing allowance, which is up to seven times the minimum wage in Jakarta.

Preparations for more 'controlled breaches' amid dual flood threat to Muzaffargarh, Multan (Dawn)

Wapda seeks 91pc increase in revenue requirement to Rs365 billion (Dawn)

Floods damaged vast areas of farmland in KP: UN-OCHA (Dawn)

Unexpected rise in cotton arrivals despite floods (Dawn)

IS-K claims Quetta bombing as toll tops 17 (Express Tribune)

President Zardari calls for world support as Pakistan reels from climate impact (Express Tribune)

Govt to seek IMF nod for CPP levy (Express Tribune)

Digital currency to be legalised once regulation is in place: SBP (The News)

PM Shehbaz to visit Malaysia next month at Anwar Ibrahim's invitation (The News)

Govt decides to sell USC assets in FY26 (Business Recorder)

Pakistan's Public Sector Development Programme: Only Rs16.59bn set aside for new projects (Business Recorder)

• Borrowing through T-bills exceeded target amid strong demand
• Barring 1-month paper, T-bill yields remained stable
• Another PKR 36.7bn picked through Sukuk auction, below PKR 100bn target

The government sold PKR 515.2bn of T-bills at a scheduled primary auction on Wednesday, data from the State Bank of Pakistan showed. The issued amount was PKR 115.2bn more than the original plan, marking the second consecutive auction in which borrowing exceeded the target. However, it was below the maturing amount of PKR 824bn, which means that there was a net decrease in the stock of T-bills.

Demand was strong, with bids totalling nearly PKR 1.5tn. Yields remained stable compared with the previous auction, except for 1-month paper, which registered a 14.8bps decline.

Meanwhile, the government raised another PKR 36.7bn through an auction of floating-rate Pakistan Investment Bonds (PIBs), against the target of PKR 100bn. Total bids stood at PKR 444bn, down steeply from PKR 873.8bn in the previous tender two weeks ago, suggesting weak demand for the bonds.

• Next policy meeting: Sep 15
• Current policy rate: 11.0%
• Last decision: Hold (Jul 30)
• Our forecast: Hold
• Rationale: Inflation is expected to rise while external trade account is likely to deteriorate due to modest economic recovery and reduced crop output amid floods

We expect the State Bank of Pakistan's monetary policy committee to leave the policy rate unchanged at 11.0% at its meeting on Sep 15. Inflation came in sharply below expectations in August, mainly due to a dip in food prices. However, this slowdown does not signal a renewed downtrend; therefore, the latest reading is unlikely to prompt the central bank to deliver a rate cut. With the impact of the favourable base effect waning, devastating floods threatening to drive up food prices, and modest economic recovery increasing import demand, there is hardly any room for further easing.

The SBP last cut its key rate in May, slashing it by 100bps. That brought cumulative cuts since June 2024 to 1,100bps. The rate was held steady in the June and July meetings amid an anticipated rise in inflation and goods trade deficit.

Inflation environment

CPI inflation eased to a four-month low of 3.0% y/y in August, down from 4.1% y/y in July, driven by a decline in the cost of perishable food items. Lower fuel, solid hydrocarbons, electricity, and textbook prices also supported the deceleration. During Jul-Aug, inflation averaged 3.5% compared with 10.4% in the same period last year. The SBP in its previous monetary policy statement on July 30 projected inflation to remain contained in the target range of 5-7% in FY26, although accelerating from a nine-year low of 4.5% in FY25.

That said, the recent floods that have destroyed thousands of acres of standing crops and killed livestock in addition to claiming dozens of lives pose a grave risk to the inflation outlook. According to media reports, some major cities across Pakistan are already witnessing a spike in food prices due to supply chain disruption. A potential steep fall in agricultural production could result in a further increase in food prices in the coming months.

Data Download

GDP growth

Pakistan's economy has achieved stabilisation, and the recovery is underway. The SBP forecasts GDP to expand in the range of 3.25-4.25% in FY26, accelerating from 2.7% in FY25. The forecast is in line with the IMF's projection of 3.6% for this fiscal year.

Some indicators indicate that economic activity is gaining traction, supported by easing financial conditions, positive business sentiments and a gradually strengthening macroeconomic environment. For instance, cement sales were up 21% y/y in Jul-Aug, signalling a pickup in construction demand; car sales surged 21.8% y/y in July; credit growth to the private sector is trending up; and manufacturing output rose to an over one-year high of 4.1% y/y in June.

However, these data were compiled before the heavy floods hit the country. The agriculture losses are expected to run into hundreds of billions of rupees, eroding rural households' purchasing power. Besides, higher inflation as well as lower farm exports are likely to weigh on growth. The complete assessment of the flood damage - caused by torrential monsoon rains and the release of excess water from India's overflowing dams - remains pending, as the disaster is still unfolding and floodwaters have not yet reached the downstream province of Sindh.

External

While Pakistan's external sector remains relatively stable, pressure is reappearing, although they are still far from posing a significant risk. The current account slipped back into negative in July, posting a USD 254mn deficit, compared with a surplus of USD 335mn in June.

The deterioration was mainly due to a sharp increase in imports and a fall in workers' remittances. August trade data from the Pakistan Bureau of Statistics, which often differ from the central bank's figures, showed that imports maintained an upward trajectory despite subdued global commodity prices, suggesting higher oil and non-oil import volumes in line with domestic economic recovery. While largely manageable, any rise in global oil prices could further inflate the import bill.

Meanwhile, exports are likely to remain resilient despite weaker rice shipments and global prices. A slightly favourable trade deal with the US may provide support for textile exports.

Overall, the SBP projected the current account to post a deficit of 0-1% of GDP in FY26, compared with a 0.5% surplus in FY25, reflecting rising imports and limited upside for remittances and export growth. Risks to the outlook include higher agricultural imports and lower food exports in the aftermath of floods.

An unfavourable current account position may make it challenging for the central bank to build up its foreign exchange reserves through interbank market purchases without putting pressure on the exchange rate. The SBP sees its forex reserves rising to USD 15.5bn by end-December and USD 17.5bn by end-June 2026, from USD 14.27bn as of Aug 22. The increase is expected to be aided by IMF and other multilateral disbursements and bilateral debt rollovers.

Conclusion

Notwithstanding August's low inflation print, we expect the SBP to maintain the status quo on the policy rate on Sep 15 as well as in the near term. With modest economic recovery fueling import demand and floods weighing on farm output and the external trade balance, the central bank is likely to stand pat.

Further Readings

Previous policy rate decisions

SBP's The State of Pakistan's Economy report

IMF staff report

BTr: PH's total debt expected to decline by year-end (Philippine News Agency)

Yields on term deposits continue to decline after BSP's latest rate cut (BusinessWorld)

BIR collections miss target for first 8 months (BusinessWorld)

Lower 10% VAT eyed (Philstar)

Power spot prices rise anew in August (Philstar)

Government mulls shutdown of coal mines, coal plants (Philstar)

Marcos signs enhanced fiscal regime for mining industry act (INQUIRER)

PH, Australia, Canada, US naval assets hold 10th joint maritime drill (Philippine News Agency)

NBI tasked to probe flood control projects mess (Philippine News Agency)

Senate subpoenas 5 contractors, 3 DPWH execs in flood control probe (INQUIRER)

House leaders want con-con to lower age rule for president, VP, senator (Philstar)

• Domestic and external portions grow by 1.3% m/m and 2.6% m/m, respectively
• We estimate that the debt-to-GDP ratio was 63.8%
• Govt expects its debt to decline towards end-2025 on the back of large repayments, smaller borrowing

The national government's outstanding debt increased by 1.7% m/m to PHP 17.56tn (USD 301.9bn) at end-July, after climbing 2.1% m/m at end-June, the Bureau of the Treasury reported on Wednesday. Both the domestic and external portions rose m/m at end-July. The total debt stock is 11.9% higher y/y. We estimate that the debt-to-GDP ratio was 63.8% at end-July.

Data Download

Domestic national government debt increased by 1.3% m/m and 12.6% y/y to PHP 12.11tn at end-July. The domestic portion accounted for 68.9% of the total debt stock. External national government debt rose by 2.6% m/m and 10.5% y/y to PHP 5.46tn.

On a related note, the national government-guaranteed debt climbed 2.3% m/m to PHP 353.0bn at end-July.

The Treasury said that it expects the national government's outstanding debt to decrease towards end-2025 as the Treasury pays off PHP 814.2bn of domestic bonds by Dec 2025. In addition, borrowing is anticipated to decline. In Jan-Jul, the financing mix was 76% domestic borrowing and 24% external financing.

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

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

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

Data Download

Inflation

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

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

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

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

Economic growth

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

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

Exchange rate

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

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

Further reading

Press release after Aug 2025 monetary policy action

Schedule of monetary policy meetings

Highlights of MB meetings on monetary policy

Monetary Policy Report

• Only 23.0% of respondents feel well informed about the enlargement process, highlighting a knowledge gap
• Citizens cite political will, rule of law issues, and corruption as significant barriers to EU membership, despite ongoing reforms

A recent Special Eurobarometer survey indicates that 91.0% of Albanian respondents support EU accession, reflecting a strong desire for membership. The EU's image in Albania is notably positive, with 82.0% of citizens expressing favourable views. However, awareness of EU policies remains low, with only 23.0% of respondents feeling well informed about the enlargement process. Citizens identified lack of political will, shortcomings in the rule of law, and corruption as significant barriers to accession. The survey was conducted between Feb-Mar 2025 and included over 26,300 citizens across all 27 EU Member States, with additional polls in candidate countries.

We note that Albania has been a candidate country for EU membership since 2014, following its application in 2009. The country has made progress in meeting the EU's accession criteria, which include political and economic reforms, the establishment of a functioning market economy, and adherence to the rule of law and human rights standards. Albania has made reforms, particularly in areas such as judicial reform, anti-corruption measures, and the strengthening of democratic institutions and the EU has provided financial assistance and technical support to help Albania implement these reforms. We believe that public support for EU membership in Albania has remained high, driven by the belief that EU integration would bring economic benefits, enhance stability, and improve governance. The EU is seen as a key partner in promoting development and addressing issues such as migration and regional security.

Despite the positive sentiment towards EU accession, challenges remain. Concerns about corruption, organised crime, and political instability continue to affect public perception and the pace of reforms. The EU has emphasised the importance of continued commitment to reforms and the need for Albania to demonstrate tangible progress in key areas before advancing in the accession process.

• Justice Minister says arbitration decision challenges Armenia's internal legal acts
  

Justice Minister Srbuhi Galyan stated that the Armenian government has voluntarily chosen not to comply with an interim ruling issued by the Stockholm Arbitration Court concerning the Electric Networks of Armenia (ENA). "As of now, the international arbitration court has issued an interim decision, essentially to apply a form of legal restraint, which the government has decided not to implement voluntarily" she told reporters.

She noted that there are legal mechanisms for both forced enforcement and legal justification for non-enforcement, particularly when a ruling contradicts public policy. Galyan emphasized that the arbitration decision challenges Armenia's internal legal acts.

She added that if a court eventually rules that the government must comply, then enforcement would be carried out through the relevant enforcement service. Still, she questioned whether any court could legitimately require a government to ignore the laws of its own state.

The legal team representing detained businessman Samvel Karapetyan previously reported that, on July 22, 2025, an emergency arbitration body appointed by the Arbitration Institute of the Stockholm Chamber of Commerce ordered Armenia to refrain from applying recent provisions of the country's energy laws to ENA and from taking further steps toward expropriating the company.

• Former ombudsman argues that Baku has officially announced the completion of registration of more than 100,000 so-called 'Western Azerbaijanis' for resettlement in Armenia

Former Armenian human rights defender Arman Tatoyan claims that Azerbaijan remains committed to its strategy of seizing Armenia. He argued that Azerbaijan has officially announced the completion of registration of more than 100,000 so-called 'Western Azerbaijanis' for resettlement in Armenia, and this registration process is continuing. He added that this indicates that the Azerbaijani authorities are actively promoting the 'Western Azerbaijan' initiative, which covers the entire territory of the Republic of Armenia, with the ultimate goal of this initiative to significantly change the demographic landscape of Armenia and achieve its complete occupation.

He also noted that every day, 250-300 people contact the Western Azerbaijan organization, expressing their desire to voluntarily register.

As the human rights activist noted, there is additional evidence that the Azerbaijani authorities are determined to continue their policy of seizing Armenia, and this course will continue as long as there are forces that place the preservation of power above national interests, and as long as autocracy and party domination reign in Armenia.

The former ombudsman recalled that the Azerbaijani authorities continue to issue identity cards (future passports) in which the place of origin is indicated as "Western Azerbaijan" along with one of the settlements in the Republic of Armenia