• If Babis reveals his plan, the president is ready to appoint him PM next week
• It puts the appointment of a new government in the week starting on Dec 15
• Now it all depends on Babis when he will shed light on his intentions

President Petr Pavel expects that ANO leader Andrej Babis will reveal his plan of how he intends to resolve his conflict of interest by the end of this week, the president told journalists on Thursday (Dec 4). Pavel reiterated his readiness to appoint Babis as prime minister shortly after Babis sheds light on his plans. Regarding a specific timeline, Pavel said it was entirely possible to appoint Babis next week (i.e. the week starting on Dec 8), and a new government in the following week (i.e. the one starting on Dec 15). This is entirely in line with our expectations, and it appears that Babis will be able to attend the coming EU summit on Dec 18 as the next Czech prime minister.

Naturally, this all depends on Babis, who has remained tight-lipped about what he intends to do. As a reminder, Babis is the sole owner of Agrofert, a major agricultural company, which has benefited from both EU and Czech state subsidies. Since the prime minister has considerable influence over how EU funding is distributed, it will be highly problematic if he remains the owner of Agrofert. The European Commission considered Babis as being in conflict of interest during his first term as PM in 2017-2021, and withheld subsidies for CZK 7bn (about EUR 290mn) over the period. This time, the EC has a bigger stick in its arsenal, as it could also threaten to delay any remaining RRF payments, where it has much bigger discretion than over Cohesion policy funds. The Czech Republic has EUR 2.6bn in RRF grants yet to receive, which is a non-negligible amount.

We expect Babis to make some steps soon, as he apparently now wants to have his new government in power as quickly as possible. Still, delays are possible, as there is no formal deadline to appoint a new government. We still expect that there will be a new government before Christmas, the only question is when exactly.

• Nominal wage growth eased to a still strong 7.1% y/y
• The CNB expected nominal wages to rise by 7% y/y, and real wages by 4.4% y/y
• Market service wages rose by 7.6% y/y, 0.6pps faster than the CNB's forecast
• Industry was behind the softer increase in nominal wages, reflecting weak demand
• Service sector wages eased marginally, by 0.1pps q/q to a still elevated 7.4% y/y
• We expect the CNB to remain retrenched in its hawkish position, and we see stable interest rates at least until Q3 2026

Real wages eased their growth to 4.5% y/y in Q3 from 5.1% y/y in Q2, according to figures from the statistical office. The slowdown was mostly due to nominal wages, whose growth reached 7.1% y/y in Q3, slower by 0.5pps q/q, while inflation picked up marginally, from 2.4% y/y in Q2 to 2.5% y/y in Q3. Furthermore, median wages reported a faster deceleration in growth, from 7% y/y in Q2 to 6.2% y/y in Q3 in nominal terms, and from 4.5% y/y in Q2 to 3.7% y/y in real terms. The print was in line with the CNB's staff forecast, which put nominal wages growing by 7% y/y, while real wages by 4.4% y/y.

Data Download

Market sectors remained the biggest source for the gap between the CNB forecast and the actual print, as market sector wages rose by 7.6% y/y, according to EmergingMarketWatch estimates. This was noticeably higher than the 7% y/y increase expected by the CNB, however. It is a strong indication that skilled labour shortages remain acute in the service sector, and that service providers are no longer digging into profit margins to make up for higher wages. It is likely the main reason why service price inflation has remained sticky for so long, and the odds are this will be the case for a while longer.

Furthermore, the discrepancy between industry and the rest of the economy has continued, as industry was responsible for most of the slowdown in headline wage growth. Nominal wages in industry rose by 5.7% y/y in Q3, their softest increase over the past 3 years, and accounted for almost 90% of the headline slowdown. Industry continued to report a shrinking employment, down by 1.4% y/y, the consequence of weak external demand for local manufacturing, as well as producers retrenching and letting go auxiliary personnel. Meanwhile, employment in services rose by 1% y/y, and by 1.1% y/y in construction. Admittedly, service sector wages eased their growth as well, but by a marginal 0.1pps q/q to 7.4% y/y, still considerably above the average. Thus, industry remains behind most of the slightly softer wage growth, which will likely not matter that much for monetary policy.

Monetary policy impact

The latest wage print is overwhelmingly supporting the current hawkish stance of the CNB board. While headline inflation has eased, according to the latest flash estimate, it was still primarily because of volatile prices. Meanwhile, robust wage growth in the service sector promises that service price inflation will remain sticky, likely longer than currently anticipated by the CNB. Given recent remarks made by CNB board members, we cannot imagine anyone moving towards easing monetary conditions in the current environment. Inflation risks remain elevated, and service prices have the bigger weight in core inflation.

With all that in mind, we believe that another hold decision at the coming MPC meeting on Dec 18 is practically guaranteed. Furthermore, we expect stable interest rates at least until Q3 2026, as the labour market momentum will take plenty of time to ease, especially if skilled labour shortages persist.

• Markets expected headline inflation at 2.5% y/y, while the CNB at 2.2% y/y
• Food prices were the main factor behind a softer headline inflation
• However, some core goods' prices also eased their growth
• Still, service price inflation remain flat at 4.6% y/y, so no relief there
• We expect a slowdown in core inflation to 2.7% y/y, which is still high
• Thus, the CNB is likely to keep interest rates stable throughout most of 2026

CPI inflation eased to 2.1% y/y in November from 2.5% y/y in October, according to the latest flash estimate from the statistical office. The print was visibly below market expectations, which put headline inflation at 2.5% y/y. However, it was only slightly below the CNB's forecast, according to which headline inflation should be at 2.2% y/y. Consumer prices fell by 0.3% m/m, while markets expected an increase of 0.1% m/m.

Data Download

Food prices were again behind the surprise, as food, alcohol, and tobacco prices eased their growth from 3.9% y/y in October to 2.8% y/y in November. Non-processed foods eased their increase to 1.9% y/y, the softest since last December. Besides, some base effects may be in play, as food & non-alcoholic beverage prices rose by 0.4% m/m in November 2024, so a decline a year later will push down year-on-year growth noticeably. Based on the same development, however, we may see another swing upwards in December, as food & non-alcoholic beverages saw a 0.7% m/m price increase in December 2024.

Meanwhile, service prices rose by 0.1% m/m, which was the same rate of increase as a year ago, which kept their year-on-year growth flat at 4.6% y/y. Thus, there has been no easing in service price inflation, and the breakdown shows that the entire slowdown in headline inflation came from goods' prices, which eased their growth to 0.6% y/y, the softest in the past 7 months. In all fairness, goods' prices did not ease only because of food prices, as goods' prices excluding food, alcohol, and tobacco fell by 1% y/y in November, faster by 0.4pps m/m.

The detailed CPI breakdown and core inflation numbers will be published on Dec 10, at 9:00 CET.

Monetary policy impact

Even though service price inflation remains sticky, we still expect a slight slowdown in core inflation, by about 0.1pps, to 2.7% y/y in November. This is still an elevated level, however, and we doubt it will change the CNB board's stance. Slowdown of headline inflation is still exclusively driven by goods' prices, aided by a strong CZK, and these can be volatile. Meanwhile, the labour market remains tight, as nominal wages continued to rise significantly above the CNB's expectations, which will likely keep fuelling service price inflation. Besides, if our expectations about food prices are accurate, we may observe another upward swing in December, which will erase the slowdown in headline inflation seen now.

As a result, we expect that interest rates will remain stable for a while. There is nothing to indicate that the structural factors behind elevated core inflation will disappear. If anything, data implies that inflationary conditions may stick around longer than originally anticipated. Thus, our expectation remains unchanged, namely that the CNB will keep its policy rate at 3.50% at least until Q3 2026.

• One thing the outgoing government may do is lower spending in the state transport infrastructure fund by CZK 37bn, to align it with planned subsidies
• However, it has rejected any additional tax cuts or increase in allowances
• Thus, if a budget bill is sent again, it will keep the fiscal framework
• Meanwhile, we expect the new government to push spending and aim for higher deficits

The outgoing government will submit a revised budget on Dec 17 if it is still in power, labour minister Marian Jurecka told journalists after the regular cabinet meeting on Wednesday (Dec 3). He said there was still an internal debate what changes, if any, to apply to the 2026 budget bill. At this point, the most likely change will be to adjust the budget for the state transport infrastructure fund so that its expenditure matches the subsidies envisaged in the 2026 budget. As the Czech Fiscal Council pointed out, there is CZK 37bn of expenses that are currently not covered by central government subsidies.

Apart from transport infrastructure funding, Jurecka doesn't believe much more will be done. For example, the outgoing government has rejected a proposal from the Pirates to increase tax allowances for households and parental allowances considerably, which would cost CZK 23.4bn annually. It also rejects ideas brought up by the new ruling coalition, which intends to spend more on pensions and industrial subsidies.

Thus, if the outgoing government is in a position to send a budget bill to the lower house again, it will keep the current fiscal framework. It means a deficit target of CZK 286bn at state government level, and 1.9% of GDP at general government level. However, we may have a new government by then, and we suspect it plans to go around the fiscal responsibility act in some way. The fastest way will be to declare an economic emergency, which only needs lower house approval, as limits on structural deficits are suspended during such an emergency. The other way would be to revise the limits in the fiscal responsibility act, though this will cost the new ruling coalition politically. Finally, the new government could use the current budget bill for a while, and then claim it requires a revision, and revisions do not need to comply with the fiscal responsibility act, only the original budget bill. Admittedly, the latter scenario is a bit murky from a legal standpoint, but we doubt anyone will be there to challenge that.

Whatever the new government does, there will be a provisional budget for some time during Q1 2026. We don't expect any permanent consequences, though public investment and any pledged wage hikes in the public sector will be delayed.

Macron negotiates peace for Ukraine in China. He wants to leverage Beijing ties with Russia (Lidove Noviny)

Putin did not directly reject American plan to end the war, Peskov claims (E15)

[Motorists' Filip Turek:] I apologize, but my conscience is clear (Mlada Fronta Dnes)

Babis rejects a complaint against Pavel [over not appointing Turek as environment minister] (Pravo)

One of the few who knows what a budget is. Economists welcome Pikora as in lower house budget committee leadership, even though his predictions have not always become true (Hospodarske Noviny)

ANO wants to bring thousands of foreigners to work. Despite SPD (Pravo)

Elite advisor in PPF seeks a share in the largest domestic billboard operator (E15)

State is a milk cow. Who doesn't milk it is robbing themselves and their family (Lidove Noviny)

Giant affair rocks Brussels [about Federica Mogherini] (Mlada Fronta Dnes)

Cheapest travel in history (Hospodarske Noviny)

• Cumulative sales rose by 6.7% y/y in January-November
• Skoda Auto did close to the market average, retaining a 34% market share
• Petrol car sales led growth, up 15.7% y/y in November and 10.1% y/y in January-November
• Plug-in hybrids were the stronger performer in the EV segment, with sales doubling in year-on-year terms in November
• Used passenger car sales increased by 18.2% y/y in November and 5.1% y/y in January-November

New passenger car sales rose by 14.1% y/y (wda) in November, up to 21, 317 units, according to figures from SDA, the car importers' association. In non-adjusted terms, car sales rose by 3.3% y/y, but the main reason was that there were two more working days a year ago than in 2025. In January-November, new car sales increased by 6.7% y/y, reaching 227,052 units. The sales of Skoda Auto, the largest local producer, did in line with the average, as they rose by 13.9% y/y (wda) in November, and by 7.1% y/y in January-November. Skoda was responsible for about a third of cumulative growth in passenger car sales, as the make has not lost its popularity. Skoda sales had a market share of 34% in November, and they are still more than the next 4 make report in sales combined.

By type of fuel, petrol car sales remained in the lead in November, reporting an increase of 15.7% y/y. However, sales of plug-in hybrids also had a significant contribution, more than doubling in year-on-year terms. Meanwhile, sales of battery electric cars continued to stall, rising by only 1.1% y/y in November, while diesel car sales fell by 1.5% y/y. In cumulative terms, petrol cars now have a vast lead, seeing an increase in sales of 10.1% y/y in January-November. The EV sector has continued to expand at a robust rate, but its contribution to growth was half that of petrol cars. Battery electric car sales increase by 27.3% y/y in January-November, while sales of plug-in hybrids were up 80.4% y/y over the period. The EV sector had a market share of 9.9% in January-November, up from 7.2% a year ago.

Meanwhile, used passenger car sales rose by 18.2% y/y in November, bringing its cumulative increase to 5.1% y/y in January-November. After a poor start, this year has shown a solid performance for used car sales, likely due to more budget offerings.

Total vehicle sales, including buses, motorcycles, trucks, tractors, and trailers, reported a 13.5% y/y increase in November, out of which new vehicle sales rose by 11.6% y/y. As a result, total vehicle sales were higher by 4.7% y/y in January-November, with new vehicle sales rising by 4.3% y/y. Passenger cars were clearly the driving factor, as sales outside that segment were still declining.

Overall, this is good news for the automotive sector, indicating that households and firms are increasingly spending on new vehicles. While growth rates are not spectacular, performance will be likely stronger than in 2024, showing that the market has returned to normal. There are naturally some structural shifts, namely the emergence of the EV sector, which was practically non-existent in 2019, at 0.5% of total passenger car sales.

• Consumption momentum continues unabated into Q4, we think
• Non-food sales accelerate due to manufactured goods, clothing purchases
• Overall impression is for stable but cautious growth with no further upward potential

Retail sales growth accelerated to 3.1% y/y in October, compared to the 3.0% y/y increase in the previous month, the statistical office (KSH) reported. Growth picked up only mildly and was still the strongest print since February. It was slightly above the 2.9% y/y average increase since the beginning of the year, in our opinion highlighting the generally stable trajectory of retail sales growth over the year so far. Seasonally-adjusted retail sales rose by 0.5% m/m, which extended the recovery in retail sales since the local trough from 2023. We think the data indicated sustained, but unspectacular, growth of household consumption going into Q4, supported by real wage growth and low overall indebtedness, supporting an upturn in borrowing appetite.

Data Download

Data Download

The stronger headline print in October was mainly on account of non-food sales. Non-food sales picked up to 5.2% y/y growth in the month and was one of the strongest increases in the year so far. Sales of manufactured goods in non-specialised shops and sales of clothing improved visibly during the month. Clothing sales, however, have been significantly volatile in the past few months, so we are not convinced that the observed strong growth could be sustained. We are rather inclined to see the figures as temporary spike, driven by seasonal differences in discount campaigns. Non-durable good sales slowed to 0.6% y/y growth in October - the weakest increase since Mar 2023, which could be due to exhausted impact from deferred purchases, in our view. Our overall impression from the data is for stable but cautious growth in retail sales, but without potential for further strengthening.

Data Download

Food sales slowed to 1.2% y/y growth in October, which can be also considered as a weak print in view of the recent history. Fuel sales rose by 0.6% y/y, practically in line with the average performance since the beginning of the year.

"It is not bad start to the year" - PM Viktor Orban signs wage agreement (Magyar Nemzet)

PM Viktor Orban: Successful negotiations in Moscow are behind us (Magyar Nemzet)

CATL's Debrecen cell factory is ready to start, plant will play key role in company's large-scale European plans (Magyar Nemzet)

Hungarian company may build cement factory in Africa, and this is not its only investment (Vilaggazdasag)

BYD has told Hungarians who it will hire at its Szeged factory: Rush for EUR 2,000 salaries has broken out (Vilaggazdasag)

Ukraine takes revenge on Hungary, government's response to Zelensky immediately arrives: If they continue, winter could be darker and colder (Vilaggazdasag)

Political analyst Gabor Torok: I am not sure that Fidesz's current strategy is good (Heti Vilaggazdasag)

Moscow mistranslation: Tense atmosphere in interpreters' association, president resigns (Heti Vilaggazdasag)

• EU Council, Parliament agree on banning Russian pipeline gas imports as of Sep 1, 2027
• Separation from Russian oil also targeted by end-2027
• Szijjarto expects EU Court case to conclude before ban enters in force

Hungary will sue the EU agreement on the disconnection from Russian energy as soon as it is adopted, foreign minister Peter Szijjarto announced. Szijjarto referred to a recent agreement between the EU Council and the European Parliament that imports of Russian LNG should be banned as of end-2026 and imports of pipeline gas - from Sep 1, 2027. A transition period will enable the ban on pipeline gas imports to enter in force later on Nov 1, 2027 in the case of long-term gas import contracts, conditional upon gas storage fill ratios. The ban could be temporarily suspended in case of a sudden risk for the security of supply in a member state but under strict conditions. Governments will be obliged to prepare national plans to showcase the path to meeting these deadlines and to diversify gas supplies. The Council and the EP did not reach an agreement on the disconnection from Russian oil yet and this was left for another upcoming regulation to be drafted by the EC. The two sides still signed a declaration of intent that the separation from Russian oil should be achieved by the end of 2027.

Szijjarto reiterated previous arguments against this agreement, saying that it violated the EU's founding treaties, which left energy policy under the competence of the individual member states. The regulation was also a legal fraud as it disguised a sanction against Russia, requiring unanimity among EU member States, as a trade restriction, which requires only qualified majority for approval, he claimed. It would be a shame if the legal proceedings in the EU Court could not be resolved within two years, Szijjarto said in response to a question about Hungary's actions in case the import ban comes into effect before the EU Court issues a verdict.

• CATL reports full order books on its annual capacity

Chinese battery maker CATL will start production of battery cells in the early months of 2026, the company said in a press release, the news portal Portfolio reported. Construction of the plant has been completed and the production lines have been installed and the work has moved to greening of the plant-adjacent areas. The company reported a full book of orders, completely covering its annual capacity of 40GWh. We think this could be considered encouraging news, given broad expectations that the number of other new automotive factories would start operations below capacity and would not contribute much to an economic recovery. CATL employed 1,000 people at present with the recruitment campaigns from the past two years managing to fill two-thirds of the available vacancies. Total employment was expected to reach 1,500 people by Q1/2026.

• Tisza buoyed by successful primary election campaign, PM Orban's visit to US does not sway voters
• Poll results should be treated with caution, we think
• Our Homeland, MKKP should be treated with caution, in our view

The opposition Tisza Party managed to increase its lead over the ruling Fidesz to 12pps among decided voters certain to vote in November, the pro-opposition Republika pollster published its latest poll. Support for Tisza rose by 1pp m/m to 45%, while Fidesz lost 1pp m/m to 33%, although the shifts were within the statistical margin of error. PM Viktor Orban's visit to the US did not seem to sway voter preferences, while Tisza's popularity could have been supported by the party's primary election campaign, the pollster commented. It called Tisza's primary elections as fairly successful, while the pro-government media Magyar Nemzet had earlier described it as "drowning in disinterest", we note. Turnout at the primary elections was 300K voters, representing roughly half of the turnout at the previous opposition primary elections in 2021, it said.

There was no m/m change in the distribution of support among all voters or among decided voters, according to the Republika poll. Tisza attracted 30% of all votes, compared to 24% for Fidesz, while Tisza led with 43% among decided voters over the 35% result of Fidesz. An increasing number of established pollsters have started to show Fidesz catching up to Tisza in the past few months, so we believe that the findings of Republika should be treated with caution.

Nationalist Our Homeland gained 1pp of support among all voter groups and will enter the parliament with 8% among decided voters due to vote. It maintained its place as the third most popular party, although it was still under pressure from the joke Two-Tailed Dog Party, which commanded 6% of the vote. The rating of the liberal DK party slipped by 1pp m/m to 4% in November, putting the party below the parliamentary threshold.

• Next MPC meeting: Dec 16, 2025
• Current policy rate: 6.50%
• EmergingMarketWatch forecast: Hold
• Rationale: NBH repeatedly warns about need to keep forint stable, stimulate forint savings

The MPC will maintain its current policy stance of keeping tight monetary conditions at least till December, we maintain our baseline scenario. The MPC did not budge from its monetary policy stance on its rate-setting meeting in October in a situation of rising government pressure to cut rates. We recall that PM Viktor Orban renewed the government calls for lower policy rate, saying that the inflation target was unnecessarily high and that there was room for rate cuts in the longer term. Economy minister Marton Nagy followed suit and argued that the inflation target could be achieved also by a lower policy rate. The real interest rate could still remain positive, but it could be lower, Nagy said, in our opinion implying room for rate cuts of around 1pp. NBH officials have insisted on keeping the current policy stance despite the government pressure, pointing to strong forint pass-through effect on inflation and elevated household inflation expectations. The NBH subsequently maintained the policy rate and its guidance in November, while the government pressure subsided anyway.

Data Download

Data Download

The MPC did not revise its forward guidance on its meeting in November, fuelling our expectations that it will stick to its current policy stance in the near term. In the longer term, we believe that recent positive developments could create an opportunity for the MPC to reduce the policy rate without sacrificing its careful and patient policy approach. In particular, the Q3 Inflation Report of the NBH showed some improvement of the inflation outlook and the September inflation data showed an encouraging slowdown in food inflation, we note. MPC members were still wary that these developments might prove transient, according to comments from the November rate-setting meeting. In addition, the forint exchange rate has remained fairly strong and the MPC has already expressed satisfaction about its impact on manufacturing PPI and import prices. The inflation outlook, however, will benefit from a more sustained slowdown in import prices, so the MPC will need to continue supporting a stronger forint in the next month, we believe. Disinflation in the food sector will also need to become more firmly entrenched, which could contribute to moderating consumer inflation expectations. This process could eventually open room for credible monetary policy easing, but the appropriate conditions for this will not be present in the next months, we expect. Accordingly, the updated NBH forecast with the December Inflation Report will be more indicative whether a shift of the monetary policy stance will be possible, the MPC also indicated in the minutes of its November meeting.

The MPC reiterated after its November meeting that tight monetary conditions were still warranted and monetary policy will continue to follow a careful and patient approach, together implying no change in the monetary policy stance in the short term. The MPC highlighted the increased importance of the forint for the inflation outlook and inflation expectations. The MPC noted some improvement in inflation expectations, but cautioned that they were still elevated, requiring stable forint in order to ensure they become anchored in line with the mid-term inflation target. It also sounded hawkish on the recent tame inflation data, pointing out that it reflected a strong downward impact from the government's price restrictions, while pricing behaviour remained excessive outside the scope of the price regulations. The MPC indicated a downward shift in the inflation outlook because of the government decision to extend and expand the margin cap, but implied that this was not sufficient to warrant a change in the monetary policy stance.

Post-meeting MPC statement from November rate-setting meeting

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

Minutes from November MPC rate meeting

Inflation Report - Q3/2025

MPC meeting calendar 2026

• Only hold decision was on November meeting agenda
• Updated inflation outlook in Q4 Inflation Report to be crucial for next year's monetary policy stance
• Inflation expectations still inconsistent with mid-term inflation target

Changing the forward-looking monetary policy guidance is not warranted, the MPC agreed on its November rate-setting meeting, according to the meeting minutes published by the National Bank of Hungary (NBH). The MPC left the base rate and the overnight interest rate corridor unchanged on the meeting. This was the only option that was on the meeting's agenda and was approved with a full consensus, the minutes highlighted, in our opinion showing no divergences of opinion within the MPC at this stage. The hold decision was in line with the stability-oriented approach of the NBH and the need to maintain tight monetary conditions, the MPC said. The MPC was in its full eleven-member composition at the meeting, while we note there will be a change for the next meeting when ex-economy ministry state secretary Peter Beno-Banai will replace Barnabas Virag as NBH deputy governor.

Data Download

Data Download

There was significant uncertainty regarding the potential for repricings in early 2026, which the NBH considers crucial for the inflation outlook over the year, several MPC members argued during the meeting. The upcoming Q4 Inflation Report will be therefore crucial from the perspective of next year's monetary policy stance, the MPC agreed. This seemed to confirm our expectations that the wait-and-see stance could be shaken in case of favourable inflation outlook in the Q4 Report. NBH governor Mihaly Varga already suggested that 2026 inflation could be better than currently expected, but we still think the improved outlook was only because of the expansion of the margin cap restrictions. Accordingly, our baseline scenario is for no immediate shift in the monetary policy stance after the Q4 Inflation Report.

The extension of the various price restriction and the timing of its withdrawal will significantly affect the future inflation course, the MPC underlined. At present, the margin cap restrictions are due to expire at end-Feb 2026, but we think the government will extend them further till after the elections. The voluntary part of the price restrictions will expire at end-Jun 2026 and this might result in an upward adjustment in some services prices, we caution.

Moreover, the MPC seemed to uniformly consider inflation expectations as inconsistent with price stability and the medium-term inflation target, despite some recent easing, the minutes showed. The stability of the forex market was of key importance for anchoring inflation expectations further down, MPC members agreed. They provided a hawkish view on recent inflation developments, pointing out that services inflation was also inconsistent with price stability, while tradables inflation was high in a regional comparison. The October inflation print was still in line with the Q3 Inflation Report, while there were also more optimistic members that focused on tradables prices being broadly unchanged and food inflation slowing down in the past months.

Interest rates down (Rzeczpospolita)

EU fight over Russian assets (Gazeta Wyborcza)

Why the America we remember is no longer there (Rzeczpospolita)

Europe to be Russian gas-free in two years (Gazeta Wyborcza)

Poles do not really believe that our country is rich (Rzeczpospolita)

2026 will see another slowdown in price increases [as companies plan smaller wage hikes; WTW research shows planned wage hike to be 5% in 2026, down from 6% in 2025 and 8% in 2024] (Rzeczpospolita)

Left wants to elimination health insurance premium, replacing it with new CIT and PIT tax (Rzeczpospolita)

Sejm to vote on overturning president's veto of bill that would have banned using chains for dogs (Rzeczpospolita)

Fight over proposed cuts to health spending (Rzeczpospolita)

Significant increase in health insurance premiums for small businesses (Rzeczpospolita)

• Bank profits already exceed PLN 40.1bn total posted in 2024
• Lending growth picks up slightly in wake of rate cuts

Polish banks' net profit rose by 14.4% y/y to PLN 40.3bn in Jan-Oct 2025 from PLN 35.2bn a year earlier, the NBP said in figures released Wed. Banks posted a record profit of PLN 40.1bn in 2024, but have already exceeded that level. Profits seem likely to approach PLN 50bn this year. The government has already passed, and gotten signed into law, a hike of the CIT rate on banks to 30% for 2026 from the 19% in effect for 2025. That is to raise some PLN 6.5bn.

Interest income rose 3.5% to PLN 148.0bn, though with the Monetary Policy Council's rate cuts the growth pace has been successively slowing. Fee and commission income rose 2.5% to PLN 22.3bn, though fee and commission expenses were up 2.6%. Net operating income rose 7.4% to PLN 116.1bn.

In terms of lending, the total loan stock rose 5.0% y/y, down from 5.8% after the previous month, though the pace of loan growth to non-financial corporates accelerated to 5.6% y/y after October from 5.3% after September. Bank lending to corporates rose 7.5% y/y, up from 6.7% after September, and lending to households rose 4.6%, up from 4.5%. Within household lending, the housing loan total rose 5.1%, just up from 5.0% after the previous month. The value of PLN loans rose by 7.3% y/y (up from 7.0%) whereas the value of CHF loans dropped 44.7% to just PLN 7.0bn.

• Mortgage loan volumes rise 36.5% y/y in Oct with the value at a records
• Cash loans, credit card data, and installment loans also rise in Oct

Polish banks and credit unions had a bumper October in terms of their consumer lending business with value and volumes up for mortgages, cash loans, credit cards, and installment loans, according to data released Wed. by the Credit Information Bureau (BIK). Mortgage loan volumes rose 36.5% y/y in October, which also rose 2.1% m/m, the mortgage loan value jumped 45.0% y/y (2.4% m/m). BIK commented that the mortgage sales level of PLN 10.86bn set a new monthly record, rising PLN 191mn from the previous record set in September. The average mortgage loan total was PLN 450,810, rising 6.2% y/y, BIK said.

Lending activity in cash loans also continued to rise, growing 8.6% y/y in terms of volumes and 15.9% in terms of value. BIK noted that borrowers are taking out increasingly large cash loans, and the overall increase is being primarily driven by high-value loans exceeding PLN 50,000. The average value of a cash loan was some PLN 26,800 in October, rising 6.7% y/y. Rises in the loan value are being lifted by the extension of loan periods and falling interest rates due to official rate cuts. Real wage growth is helping out as well, BIK noted. The cash loan total for Jan-Oct tops PLN 100bn, BIK added, noting a record would likely be set this year.

Credit cards saw volumes rise 6.0% y/y and the credit card limit value climb 28.9%. BIK did not comment further on the segment.

For installment loans, the volume rose 17.4% y/y and the value some 4.6%. BIK noted that though the value here was still down in Jan-Oct, there has been greater interest in this product of late. The October increases, which broke a prior declining streak, were not only seasonal in nature and may herald a longer-term trend supported by wage growth and falling interest rates. High retail sales may also contribute to improving the sales of installment loans in the coming months, BIK said, though it added that for a bigger upward move it will be necessary for the level of geopolitical uncertainty to be reduced since that would encourage Poles to increase consumption.

Overall, real income gains continue, but the key factor in newly revived across-the-board lending volumes and value seems to be the Monetary Policy Council's rate-cutting endeavour. The MPC has not cut by 175bps with the latest 25-bp cut to go into effect on Thurs. This and the November cut by 25bps is likely to further fuel lending growth in November and December and lead to positive growth in all categories.

• Next MPC meeting: Jan 13-14, 2026
• Current policy rate: 4.00%
• EmergingMarketWatch forecast: 4.00%

Rationale: The Monetary Policy Council has cut rates by 175bps, lowering the key rate to 4.00% from 5.75% before its "adjustment cycle" kicked off in May. But now that key rate has hit a level at which NBP head Adam Glapinski has talked about as possibly seeing a pause, there is a question of what happens now. With CPI inflation at 2.4% y/y, real rates remain positive and more easing is possible. MPC member Ludwik Kotecki has talked of a key rate of 3.50%, and we are inclined to believe that level will be hit. The question is timing.

Glapinski's presser on Dec 4 will be key to determining the outlook. It can't be ruled out that Glapinski will talk of at least one more 25-bp cut, which might then be possible in January. On the other hand, the start of the new year will bring with its higher administered prices and there are many unknowns, including regarding power prices. In 2026, the economy is also to pick up in part due to much bigger EU fund flows. However, because Statistics Poland (GUS) delays the release of early-year inflation data until it revises its basket in mid-March, where inflation actually is going early next year won't be apparent until after the MPC's March sitting.

With 175bps now being cut, we thus do see room for Glapinski to signal a pause at his presser on Thurs. That said, the MPC doesn't seem as worried about wages, inflation is below the 2.5% target, and inflation is likely to remain low, possibly helping him remain relatively dovish.

MPC's post-sitting statements

Latest council minutes

Latest NBP inflation report (November 2025)

Most recent MPC voting results

Archived video of all MPC press conferences

• MPC cut its key rate by 25bps to 4.00% on Wed. in another 'adjustment'
• MPC's post-sitting statement doesn't give much in terms of forward-looking comments
• NBP chief Glapinski's Thurs. presser will be key for outlook

The Monetary Policy Council cut its rates by 25bps across the board on Wed. in its fifth straight cut, bringing the key rate to 4.00% in what it said in its post-sitting statement was a reflection of inflation developments and the inflation outlook. The MPC noted that CPI inflation slowed to 2.4% y/y in November from 2.8% in October, and added that core inflation likely decreased again. "Taking into account inflation developments and its outlook for the subsequent quarters, in the council's assessment, it became justified to adjust the level of the NBP interest rates." The one difference with the November working is that in November the council talked of an "improved outlook" whereas this wording was dropped. That might be a sign of a slightly more hawkish slant.

The MPC did stick to its characterization of its cuts as 'adjustments.' That terminology is presumably being used to avoid fueling expectations that might be created if it used "easing cycle," though it is hard not to describe six cuts at the past seven sittings as an "easing cycle," making this difference somewhat moot.

The MPC gave its usual statement about future decisions being based on several factors, but it did make one noticeable change. Whereas in November it talked of "elevated wage growth" being one key risk factor to inflation, it mentioned only "wage growth" in December, possibly suggesting it no longer sees wage growth as "elevated." Indeed, corporate wage growth slowed to 6.6% y/y in October from 7.5% in September, easing to the slowest pace since early 2021.

Overall, the MPC's post-sitting statement did not clear up the outlook for more easing in early January or next year, though the council might have become slightly more hawkish since it does not see an improved inflation outlook. On the other hand, the MPC also no longer sees wage growth as elevated. With the lack of direction given in this statement, NBP and MPC chair Adam Glapinski's Thurs. presser will be key for the outlook. We could see commentary pointing in the direction of a pause in easing for some time, though this remains to be seen. With CPI inflation of 2.4% and a key rate of 4.00%, there is still room to cut. The question is when.

• 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 again lower its key rate by 25bps to 4.00%, matching the consensus expectation, according to a statement. The MPC will publish its post-sitting statement at 16:00 CET. The decision was in line with the new consensus expectation, though before CPI inflation was flashed at just 2.4% y/y last week many had expected 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 the usually brief post-sitting statement.

Data Download

Overall, the MPC has now cut rates by 175bps in what was much more easing expected for the year, and takes the key rate down to 4.00% from 5.75% at the start of the year. Glapinski has been saying for a bit now that he is comfortable cutting rates till about 4.00% and then there should be a wait and see, though other members have given lower potential terminal rates more in the 3.50% ballpark. Considering Glapinski's comments and the scale of easing in 2025, we see the risk that the December cut will be something of a 'hawkish cut' and Glapinski and the MPC will prepare to keep rates on hold through Q1 2026 due to potential inflation threats plus the prospect of a strong economy next year. That said, with CPI inflation of 2.4% y/y, real rates are still relatively high and thus there is room to cut. Though the MPC is likely to pause for a time, and until after the CPI basket is updated in mid-March, there is likely room to cut to 3.50% and the question of whether more can be done.

• Registration change slows to zero from 9.7% y/y in Oct
• Registrations fall 7.2% m/m to 54,977 units in Nov from 59,254 units in Oct
• In Jan-Nov, registrations rise 6.4% y/y to 591,288 units

Polish passenger car and light commercial vehicle (LCV) registration growth slowed to near zero in November after having risen 9.7% y/y in October, according to data published Wed. by the car-market monitoring company Samar. The November total fell 7.2% m/m to 54,977 units from 59,254 the month before, and held near the 54,963 seen the year before. In Jan-Nov, registrations rose 6.4% y/y to 591,288 units.

Samar noted that November did still represent a continuation of the upward trend in the new car sales market, though the increase was indeed minimal. That said, Samar said that the November registration total was the highest in many years. As for trends, Chinese sales fell 3.5% m/m to 5,105 cars, putting sales at 39,340 units in Jan-Nov and giving such makers a 10.4% share, a record high. The new electric passenger car market share topped 10% in November, setting a record at 10.1%.

Samar did not, however, give a new forecast for the year. It expects registrations to rise 7.1% to 662,000 units. The year is to see 593,000 passenger car registrations and 69,000 LCV ones.

In the November breakdown, passenger car registrations fell 0.3% y/y to 49,027 units, which marked a 7.0% m/m decline. In Jan-Nov, such registrations rose 6.8% y/y to 529,648 units. LCV registrations rose 2.3% y/y to 5,950 units in November in a total that marked an 8.8% m/m decrease. In Jan-Nov, LCV registrations rose 3.1% y/y to 61,640 units.

Overall, vehicle registration totals continue to be strong despite the relative deterioration in the November registration dynamic. In part, this reflects the impact of Chinese EVs, which have brought a scale of affordability to that market. There was also likely pent-up demand from prior years, which had been noted for supply shortages. Interest rates have also come down by 150bps so far this year [and possibly will come down by more], helping financing conditions. Registrations are also likely getting a boost on reports the government will lower the depreciation limit for companies to PLN 100,000 from PLN 150,000 for passenger cars emitting at least 50g of CO2/km. One imagines December will be strong as well.

• Imports rise by 2.6% y/y, driven by strong investment goods
• Exports grow by 2.2%, but weak consumer goods limit overall improvement
• Cumulative deficit swells by 12.4% as coverage ratio falls to 74.4% in Jan-Nov

The external trade deficit widened by 4.0% y/y to USD 7.8bn in November, the trade ministry's preliminary figures showed. The widening stemmed almost entirely from the import side, as total imports increased by 2.6% y/y to USD 30.5bn, while export growth remained comparatively subdued. Imports of investment goods advanced by a strong 13.0% y/y, suggesting ongoing demand for machinery and equipment. Raw material purchases rose by a modest 1.5% y/y and consumer goods imports contracted by 3.6% y/y, hinting at softer domestic consumption. From a geographical perspective, the EU accounted for 31.7% of total imports, followed by Asian counterparts with a 24.9% share and other European economies with 20.7%. On a country basis, China remained the primary supplier with a 13.6% share of total imports, ahead of Russia at 10.2% and Germany at 8.2%, the data showed.

Exports were up by 2.2% y/y to USD 22.7bn in November, recording a moderate gain yet failed to prevent a further widening of the deficit. Investment goods exports recorded a solid performance, jumping by 16.2% y/y to USD 3.6bn. In contrast, raw-material exports edged down by 0.4% y/y to USD 10.7bn. Furthermore, consumer goods exports fell sharply by 16.2% y/y to USD 3.3bn, pointing to weaker foreign demand for Turkish final consumer products and possibly reflecting tighter conditions in key destination markets or increased competition from alternative suppliers, we think. In terms of destination breakdown, the EU retained a dominant position, absorbing 43.3% of Turkey's total exports, we note. At the country level, Germany held the top position among export destinations, with the US and UK following closely. Together, these three markets accounted for 20.6% of total exports.

The cumulative external trade deficit deteriorated by 12.4% y/y to USD 82.5bn in Jan-Nov. Over this period, import growth of 5.7% y/y outperformed the 3.7% y/y increase in exports. As a result, the export-to-import coverage ratio slipped by 0.4pps y/y to 74.4%. When energy and gold were excluded, the coverage ratio still retreated by 2.3pps y/y to 92.3%, reflecting that the deterioration was not solely on the back of volatile commodity components. On an annualised basis, the external merchandise deficit rose by 14.8% y/y to USD 91.3bn.

• 49 lenders from 22 countries participate in multi-tranche transaction
• Pricing ranges from SOFR+1.50% to SOFR+2.15% across three maturities

Garanti BBVA secured a sustainability-linked syndicated loan facility with a total size of approximately USD 433.4mn, the local media reported. The bank raised USD 97.75mn and EUR 61mn with a maturity of 367 days, USD 157mn and EUR 28mn with a maturity of 736 days, and USD 75mn with a maturity of 1,103 days, structured in six separate tranches sourced from international markets, the media added.

The transaction attracted participation from 49 financial institutions across 22 countries, which reflected continued international confidence in the bank's balance sheet and sustainability strategy, the sources said. The all-in cost for the 367-day tranche stood at SOFR+1.50% for the USD portion and Euribor+1.25% for the EUR portion. For the 736-day tranche, the total cost amounted to SOFR+1.90% for the USD share and Euribor+1.65% for the EUR share, while the 1,103-day USD tranche carried a total cost of SOFR+2.15%, it indicated.

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

Statement from DEM after Imrali visit (Hurriyet)

President Erdogan: Statements targeting MHP leader Devlet Bahceli are unacceptable (Hurriyet)

127 companies knock on Capital Markets Board's (CMB) door (Sozcu)

CHP's Veli Agbaba reacts to TUIK: They are trivialising labour of millions (Sozcu)

First meeting of minimum wage determination commission to take place on Dec 12 (Sozcu)

Trade minister Omer Bolat: Trade cooperation between Turkey and Egypt is strengthening (Sabah)

Turkey to explore for oil and natural gas at five points in Pakistan (Sabah)

Foreign minister Hakan Fidan meets his Belgian counterpart (Sabah)

Terrorism-free Turkey commission to hold its 19th meeting (Sabah)

• Labour ministry reportedly proposes cutting government representatives from five to one member
• Turk-Is withholds participation decision until structural changes become official
• Majority rule still lets government and TISK override worker representatives, in our view
• We project 24-29% rise in net minimum wage to TRY 27,378-28,533

The minimum wage determination commission, comprising representatives from the government, labour and employer groups, is scheduled to convene for its first meeting on Dec 12, the local media noted. According to the usual practice, the Commission convenes four times before reaching its decision, we remind. The final figure for the 2026 minimum wage was expected to be announced by Dec 31, with implementation effective from Jan 1, 2026.

Following the union's strong opposition to last year's 30% increase, debate over the fairness of the 15-member panel, currently structured with five representatives each for workers, employers, and the government, has intensified, the media highlighted. In response, the ministry reportedly proposed a new formula that reduces the government's representation from five members to a single representative, while maintaining the participation of Turk-Is on behalf of workers and TISK on behalf of employers, the media claimed. This arrangement remained at the proposal stage and has not yet received official approval, we note. The leadership of Turk-Is indicated that it will announce its final decision on whether to join the upcoming talks only after any structural changes are formally enacted, we note. As a result, for the time being, considerable attention remained focused on Turk-Is and its stance on the proposed revision of the Commission's composition.

Even if the new formula is approved, its practical impact on outcomes, particularly in favour of workers, remains uncertain, we assess. Assuming an 11-member structure, decisions will still depend on a simple majority. In such a framework, alignment between the government representative and the TISK representative could prove decisive, enabling them to secure preferred outcomes regardless of objections from worker representatives to the best of our knowledge.

Currently, the minimum wage stands at a gross monthly amount of TRY 26,005.50 which translates to a net take-home pay of TRY 22,104.67 after deductions. For employers, the total monthly cost of employing a minimum wage earner is TRY 30,621.48. This figure includes the gross wage, a social security premium contribution of TRY 4,095.87 and an unemployment insurance fund contribution of TRY 520.11. As of July, employees earning the minimum wage accounted for roughly 40% of the total workforce. This share underlines the wage-setting process directly influenced a broad segment of the labour market and carried material implications for aggregate demand dynamics, we assess.

There has been no formal communication from the authorities yet regarding the likely adjustment, but the steady climb in the hunger threshold, now standing at TRY 29,827.78 and clearly exceeding the current net minimum wage, framed the political and social context of the debate, we assess. Based on our hybrid model, a credible 2026 net minimum wage range appeared to fall between TRY 27,378 and 28,533, corresponding to a 24-29% uplift.

• Next MPC meeting: Dec 11, 2025
• Current policy rate: 39.5%
• EmergingMarketWatch forecast: Cut by 100-200bps
• Rationale: Broadening but still partial disinflation justifies limited and conditional easing

We expect the CBT to pursue a measured accommodation at the upcoming MPC meeting, likely delivering a 100-200bps rate cut, although our analysis suggests that maintaining the current level for another month would better safeguard the disinflation trajectory. The CBT increasingly grounds its decisions on broader inflation distribution metrics, with explicit references to median inflation in its communications. Accordingly, we incorporate those metrics in our assessment and illustrate the trend with the following figures.

Figure 1. Median inflation and SATRIM metrics

Figure 1 shows that the median inflation, its three-month smoothed variant, and the SATRIM measure are all moving lower in a broadly consistent manner, now converging around the 29-30% range. This convergence across distinct statistical treatments indicates that disinflation is becoming more embedded in the inflation process and less dependent on one-off base effects or temporary price corrections, we note. That said, the pace of this improvement appears to be moderating, with the smoothing profiles beginning to flatten rather than continuing to accelerate downward. In our view, this reflects that while price-setting behaviour is clearly shifting toward greater restraint, the system has not yet transitioned into a regime compatible with the CBT's end-2026 target of 16%. To reach that objective, these curves would need to continue compressing and ultimately settle closer to a low-20s range over the coming quarters before moving meaningfully lower, we think.

Figure 2. Inflation dispersion: % rising, % falling, and net balance (pps)

Figure 2 approaches pricing breadth through a rising-falling structure, showing the share of items with price increases versus price declines, along with the resulting net balance of upward price momentum. This allows us to see not only how many items are becoming more expensive, but also how many are stabilising or falling in price. While the direction of travel is encouraging, with the net balance gradually easing, the smoothed trend has begun to flatten, indicating, we think, that the improvement is slowing. In our view, this profile is consistent with progress toward disinflation, but still sits above what would typically characterise a mid-teens inflation regime. To align fully with the CBT's end-2026 target of 16%, further compression in the net balance will likely be required, suggesting, in our assessment, that disinflation is advancing but remains incomplete.

Figure 3. Item-level inflation histogram and density shift

Figure 3, comparing item-level distributions for October and November, shows a subtle but meaningful shift toward more moderate pricing behaviour. The slightly left-leaning November distribution and the thinning of the right tail indicate that outsized price increases are becoming less common, and the clustering around lower inflation rates points to emerging discipline in price adjustments. However, this movement remains incremental rather than transformative, we assess, and the overall shape of the distribution is still broadly consistent with a high-inflation environment. To move from roughly 30% median inflation toward the CBT's 16% end-2026 objective, this moderation will need not only to persist but to deepen, with a more pronounced leftward shift, we think, and a more visible build-up around very low or even negative m/m rates, we emphasise. In other words, the current pattern supports the disinflation narrative, but it does not yet describe the sort of distribution one would associate with a firmly established mid-teens inflation regime, we note.

Data Download

Taken together, these micro-level indicators, in our opinion, suggest that disinflation is broadening in scope and gradually shaping price-setting behaviour rather than merely showing up in headline averages. With the CBT's target of 16% inflation for end-2026 in view, sustaining credibility around the disinflation trajectory becomes crucial, we note. In this regard, the CBT, in our assessment, should ensure that the easing in inflation metrics is interpreted as part of a managed, data-led process rather than as a signal of premature policy relaxation. If it opts to cut, a measured 100bps move would make sense, provided it is accompanied by strong communication that real interest rates will remain decisively positive and consistent with the glide-path toward the 2026 objective, we think. This would recognise the progress achieved so far while clearly signalling that the disinflation strategy remains intact and non-negotiable, in our opinion. Furthermore, we think this approach preserves policy accountability, avoids triggering premature recalibration of price expectations and reinforces the message that the current episode of disinflation is intended to be durable rather than transitory.

Summary of October rate-setting meeting

MPC rate decision in October

Quarterly Inflation Report for Q4

Monetary policy strategy for 2025

• Agreements cover winter deliveries spanning next ten years

The state energy company BOTAS secured a pair of multi-year LNG supply arrangements with Germany's SEFE and Italy's ENI for deliveries during the winter periods over the next decade, the local media reported. The agreement with SEFE covered approximately 6bcm of natural gas equivalent to be supplied to BOTAS, while the ENI contract committed 5bcm. These deals positioned Turkey to reinforce seasonal energy security, broaden supply diversity, and strengthen strategic links with leading European energy partners, signalling continuity in long-horizon procurement strategy rather than short-term spot-market reliance, according to the energy minister Alparslan Bayraktar. At this time, no further details were provided.

Government weighs two options to pay debt in January (La Nación)

This is how the Chamber of Deputies looks: who moved to the libertarian bloc and who will act as arbiters to approve laws (La Nación)

Letter to Milei: Villaverde resigned her Senate seat after being challenged over alleged links to drug trafficking (La Nación)

LLA euphoria: Martín Menem re-elected as president of the Chamber of Deputies and will have authority to form committees (La Nación)

YPF confirms ENI and Adnoc will join Vaca Muerta and says it is preparing for a low-price scenario (EconoJournal)

Government raises USD 700mn through privatization of Comahue hydroelectric plants (Infobae)

Sharp drop in auto production, down 29.3% y/y in November (Clarín)

Debt issuance wave continues: Santa Fe to issue USD 500mn bond and Vista seeks USD 400mn in financing (Clarín)

Argentina will produce copper again: Swiss giant reopens shuttered mining project in Catamarca (Clarín)

Question:

It was reported in early November that Economy Minister Luis Caputo held a meeting with investors organized by JPMorgan, where the minister said he would present a plan for a bond buyback and FX reserve accumulation within 30 days. Some news outlet mention Caputo would meet with investors in early December. Have you heard anything about the meetings or a possible announcement?

The question was asked in relation to the following story: Caputo would announce debt buyback and reserve accumulation plan within 30 days

Answer:

The only local mentions we could find about Caputo meeting with investors at some point in early December are from a source we don't trust, though the minister meets with investors often these days. As for the announcement of a plan, we hadn't seen anything until Caputo mentioned in a forum earlier Wed. that he would share more information about FX reserve accumulation plans and a loan from banks (presumably would fund any bond repurchase program) at a later point. We don't really know the context of that early November mention about announcing financial plans within 30 days, but given what we know of Caputo, he was probably vague and will not feel obliged to fulfill that 30-day deadline. Right now the situation seems fluid and there are different options on the table, so it wouldn't be surprising if it takes Caputo a few more weeks to decide exactly how to proceed.

Question:

The comment on the Treasury buying USD as the monetary base grows is confusing. Would the BCRA be creating ARS to buy USD in this scenario? As in assuming ARS demand rises, they can create more without driving inflationary pressures. Is the assumption that the Treasury's USD purchases were only due to their cash surpluses correct?

The question was asked in relation to the following story: Caputo ponders bank loan offers for USD 7bn, says could buy USD 7bn in reserves

Answer:

Our comment in the second-to-last sentence in the second paragraph perhaps caused the confusion, since the causal link could be interpreted backwards. It's not that the Treasury buys USD as the monetary base grows. Rather, if demand for money grows, then the Treasury buys USD unsterilized to satisfy that demand, and the monetary base grows as a result. We believe it's an archaic setup, and for now Caputo's "rising demand for money" seems to mean little more than "the exchange rate has appreciated to a level we like." Hopefully they eventually move to a more orthodox reserve accumulation framework with clear, verifiable triggers for USD purchases.

As for the second question, the government claims that Treasury USD purchases were made with cash surpluses so far, but a) that's not really accurate, and b) those cash surpluses are nearly exhausted. We say that claim is not accurate because the BCRA sent the Treasury unrealized accounting profits equivalent to USD 9.9bn earlier this year.

• Alumbrera to produce 75k tons of copper and 317k ounces of gold starting in 2028
• Alumbrera restart creates operational synergies with Glencore's developing MARA project

The mining multinational Glencore announced Wed. its plans to restart activities in the copper and gold project named Alumbrera, which was last active in 2018, according to a presentation. Glencore expects to begin restarting the operation in Q4 2026, achieve first production in H1 2028, and then operate the mine for four years. Once fully operational, the mine is expected to produce 75,000 tons of copper, 317,000 ounces of gold, and 1,000 tons of molybdenum.

Beyond this output capacity, Glencore said the restart of Alumbrera is a natural enabler for its larger nearby project MARA, one of two big copper projects Glencore is pursuing in Argentina. For MARA, Glencore intends to use the processing plant and mining infrastructure in place at Alumbrera. Thus, the Alumbrera restart reduces ramp-up risk for the concentrator and downstream logistics, maintains the workforce ahead of MARA's first ore and keeps critical infrastructure in operation.

• FX bond issuance wave continues after record November for corporate issuers

The province of Santa Fe is in the process of completing a USD 500mn issue of a NY-law bond, while oil company Vista raised USD 400mn with an 8-year global bond at 8.25%, the daily Clarin reported Wed. Santa Fe would be the third province to return to international bond markets this year, following in the footsteps of Cordoba and the City of Buenos Aires. Santa Fe is expected to allocate about half of its proceeds for the cancellation of bonds maturing in the next two years. [Update: Santa Fe ends up raising USD 800mn at 8.1% as demand hits USD 1.8bn].

Vista had already raised USD 500mn last June, and the oil industry as a whole has been very active in the bond and loan markets. The oil and gas sector shows important room for export-led growth over the next half decade, but getting there requires continued investment in drilling and transport infrastructure.

Overall, the post-election wave of bond issuance continues after November marked a record in corporate FX bond sales. Borrowing costs for the better issuers have been a touch above 8.00%. The sovereign is expected to make its return to international bond markets in Q1 next year.

• Caputo says banks offer USD 6-7bn, govt ponders how much to take for January FX payments
• Caputo says bond market return gets closer, expects spread compression before it happens
• Caputo says reserve accumulation will get easier, will buy only as demand for money grows
• Caputo projects USD 7bn in reserve purchases if monetary base/GDP holds unchanged in 2026

Economy Minister Luis Caputo said his team evaluates multinational bank loan offers for up to USD 6bn or USD 7bn, which would be used to meet the next big round of Treasury interest and amortization payments due in January, according to comments made Wed. in a business forum. Caputo said the government wants to ensure it can cover those payments without a decline in FX reserves, so the team is now studying how much it makes sense to take in a loan. The minister said the government is getting closer to returning to bond markets, and expects efforts to cover FX payments without reserves and pass important reforms through Congress will lead to more decline in sovereign bond spreads soon.

On FX reserves, Caputo said the government regaining the ability to refinance its FX obligations will make reserve accumulation easier, as USD purchases will not be spent on payments like it happened in 2024-2025, and there will be less anxiety about the timing of these purchases. The minister explained that the process will be subject to the recovery of domestic demand for money, because the government doesn't want to buy reserves by growing its remunerated liabilities. Caputo said that according to the government's models and macro forecasts included in the 2026 budget bill, the Treasury will purchase USD 7bn if the monetary base stays unchanged in terms of GDP, and an extra USD 7bn for every 1pp rise in the monetary base. These numbers don't include the possibility of buying USD from net financial account inflows in excess of the CA deficit.

On the currency band, Caputo said Argentina remains too volatile and its financial markets too shallow, so the band stays.

Overall, the government having access to bank loans to cover FX debt payments is good news, and for now it seems that the option to issue a bond to cover the January debt payments is not at the top of the list. Covering January with a short loan and waiting for the bond launch makes sense if Caputo expects sovereign spreads to decline over the next few months, a result of economic growth picking up, the government passing important reforms through Congress, and perhaps concerns about FX reserve accumulation getting partially cleared.

However, nothing Caputo said in this forum clears our concerns about FX reserve accumulation, or lack thereof. Subjecting the reserve accumulation process to the recovery of some hidden measure of money demand and financial account inflows is not ideal, especially when the minister insists on upholding a currency band that appreciates a real exchange rate that already looks too strong. The situation would change for the better if the government announced a rule-based reserve accumulation program, but this doesn't seem to be an option.

Lula predicts 'good news' on tariffs after conversation with Trump (Terra)

Lula discussed with Trump use of US to launder money from tax fraud in Brazil (O Globo)

US requested documents on organized crime after call between Lula and Trump, says Haddad (UOL)

Lula tells Trump that military action in Venezuela would have collateral effects, but American president is evasive (Estadão)

[STF's] Mendes rules that only Attorney General can request impeachment of Federal Supreme Court (STF) justices (Agência Brasil)

Senators draft constitutional amendment against Gilmar Mendes's decision restricting impeachment of ministers (Veja)

Postal workers approve strike in São Paulo (Poder360)

Brazil reaches lowest levels of poverty and extreme poverty in IBGE historical series (G1)

• Lula says relationship with Trump is very good
• Lula says he asked Trump to help combat organized crime by arresting Brazilian criminals living in US

President Lula da Silva said Wed. that he is hopeful for another US tariff rollback following a phone call with US President Donald Trump on Tues., according to comments made during an interview for local media. Lula stated that his relationship with Trump is very good and that he asked the US president to help Brazil fight organized crime, starting with the arrest of Brazilian criminals residing in the US.

Overall, Lula appears optimistic about a further reduction of the additional 40% US tariff on Brazilian exports after Trump lifted some of those tariffs on agricultural products in November. In our view, the Tuesday phone call signals a closer diplomatic engagement with the US, aiming to keep Brazil on Trump's radar and add pressure for a rollback, especially given that the imprisonment of former President Jair Bolsonaro has not strained the relationship that has been gradually rebuilt since September. Although bilateral negotiations seem to be progressing, we remain somewhat skeptical about a broad rollback of tariffs in the near term. Still, the government could have non-public information about the negotiations, so a positive surprise cannot be ruled out.

• Decision to be reviewed by the other STF justices on Dec 12-19
• Decision is expected to further strain relations between judiciary and legislature

Federal Supreme Court (STF) Justice Gilmar Mendes ruled Wed. that only the Prosecutor General of the Republic may request the impeachment of STF justices, suspending a previous decision that allowed any Brazilian citizen to do so and limiting the Senate's ability to initiate such proceedings based on the principle of judicial independence. Mendes determined that approving an impeachment proceeding against an STF justice in the Senate would require a two-thirds majority rather than a simple majority, as stated in current legislation. The decision was issued individually and still needs to be validated by the other STF justices during deliberations scheduled for Dec 12-19. The other justices have not yet commented on the ruling, making it difficult to assess whether it will be upheld. Even so, we believe validation is possible, although perhaps with some adjustments to soften the impact.

Overall, Gilmar's decision has the potential to reignite tensions between the legislative and judicial branches and which could spill over into relations between lawmakers and the government given that the STF is viewed by lawmakers as supportive of the executive. As a result, discussions may resume on proposals to limit individual (monocratic) rulings and to allow Congress to overturn court decisions (though the latter is likely to be seen as unconstitutional and thus reversed by the STF). In our view, Gilmar's decision aims to shield the STF from what are seen as arbitrary actions by the Senate, especially in a context where the right is seeking a majority in the upper house in 2026 to potentially pursue impeachment requests against justices (this aligns with a broader global trend among authoritarian right-wing movements to control the judiciary, as seen in El Salvador). Despite what appears to be an attempt to strengthen the institution, the STF seems to be legislating through judicial decisions, which can also be seen as an overreach of its authority and may bolster the opposition's narrative against the court, in our view.

• Sales fall y/y for second consecutive month, ending eight months of mixed signals
• Sales fall 8.5% m/m in Nov after two consecutive increases

Total automotive sales, excluding motorcycles, fell 5.9% y/y to 238,743 units in November, the decline widening from a 1.6% drop the previous month to mark the second consecutive drop after eight months of mixed results, according to data released Tues. evening by the National Federation of Automotive Vehicle Distribution (Fenabrave). On a monthly basis, sales fell 8.5% m/m, reversing direction after two consecutive increases. November had the same number of working days y/y, though it had four fewer working days compared with October. In Jan-Nov, total sales rose 1.4% y/y to 2.4mn units.

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Passenger cars, which accounted for 76.3% of all sales in November (up from 73.9% in October), fell 6.0% y/y, marking the second consecutive decline, while light commercial vehicle (LCV) sales fell 4.9%. Truck sales fell 12.1% y/y in the nineteenth consecutive decline. Bus sales were the only segment to rise in November, climbing 14.4% y/y, thereby halting a four-month declining streak. In monthly terms, bus sales were also the only category to increase.

Overall, Fenabrave said that the monthly decline was expected given the lack of working days, but noted that the cumulative sales pace is still in line with its forecasts for 2025, except for trucks. It also noted that the Sustainable Car Program, which reduced taxes for some cars, has been supporting sales and curbing a sharper decline amid the tight monetary policy. Fenabrave said it expects a 2.6% increase in sales in 2025, which is a moderate pace compared with the forecast earlier this year.

• Services PMI exceeds 50-pt neutral mark for first time since March
• New businesses show moderate growth amid increased demand, supporting employment expansion

The S&P Global Services Business Activity Index for Brazil rose 2.4pts m/m to 50.1pts in November from 47.7pts in October, marking the second consecutive increase, according to data released Wed. by S&P Global Ratings. The increase pushed the index above the 50-pt neutral mark for the first time since March, indicating some recovery in the sector ahead of the holidays. S&P said better demand allowed for moderate growth in new businesses and an expansion of employment. Some companies attributed their sales growth in November to COP30. Expectations rose to their highest level in six months, though there are concerns about the potential impact of the 2026 elections on the economy.

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Selling prices rose at a more moderate pace despite the fastest increase in input costs in three months, S&P said. Companies reported higher prices for food and beverages, electricity, fuel, insurance, stationery, property taxes, and rentals. S&P highlighted the contrast between rising input prices in services and falling costs in the manufacturing industry.

Overall, the services PMI moved back into expansionary territory after remaining below it for seven months. The increase is likely linked to the holiday period, with additional support from COP30 in Belém. In our view, the more optimistic outlook also appears related to the recent approval of the income tax reform -- which will take effect in 2026 and increase household disposable income -- as well as expectations for the start of monetary easing. It is worth noting that services inflation remains pressured by input costs, one of the upside inflation risks highlighted by the Copom, thus supporting our expectation the Selic will remain unchanged at 15.00% at the December policy meeting next week.

• MPC meeting: Dec 9-10, 2025
• Current policy rate: 15.00%
• EmergingMarketWatch forecast: Hold

BCB Governor Gabriel Galípolo has reaffirmed the Copom's conservative stance amid many uncertainties, including the final effect of the US tariff hikes and in light of a still resilient labor market. His remarks add to previous ones about a slow economic deceleration amid mixed signals and persistent de-anchored inflation expectations. All of this support our expectation that the BCB is likely to hold the Selic unchanged at 15.00% at its nearest Dec 9-10 policy meeting.

Formal job creation grew at a slower pace than expected in October, though it still marked the tenth consecutive month of positive job creation. That blip could indicate that the labor market has started to feel the deeper impact of the BCB's tightening. However, the unemployment rate fell to another record low of 5.4% in the rolling quarter ended in October, showing the resilience of the labor market and supporting demand amid real wage gains. The average real wage also reached a new record high in October, which also supports the Copom's expected decision to keep the Selic unchanged.

Meanwhile, industrial output fell 0.5% y/y and rose a slight 0.1% m/m in October, adding to the sequence of mixed signals the sector has been giving. These mixed signals are in line with what the BCB calls an economy at a turning point. As monetary tightening affects the economy, the Finance Ministry forecasts a 0.3% q/q increase in Q3 for the industrial sector, easing from 0.6% in Q2. Although this supports the deceleration expected by the Copom, its members have been saying the slowdown is weaker than anticipated and, while this reduces the chances of a recession, it could demand a tighter monetary policy for longer.

Another issue still pressuring the Copom to hold the Selic rate is the persistent de-anchoring of inflation expectations. Analysts polled by the BCB forecast that 12-month cumulative inflation will fall below the 4.50% upper limit of the +/- 1.50-pp fluctuation band around the 3.00% target this year -- an important downward revision from early 2025, when they expected inflation to reach 5.00%. Although analysts have been trimming their inflation expectations for 2025 and 2026, forecasts for 2027 and 2028 remain de-anchored from what the BCB forecasts. The BCB expects inflation to fall to 3.20% by end-2028 while analysts see it at 3.50%. As the Copom indicated in its latest minutes, this de-anchoring is a common concern for all members, which should contribute to the decision to keep the Selic at 15.00% in the committee's last meeting of the year.

Overall, there aren't many doubts that the Copom is likely to hold the Selic unchanged at 15.00% in December, as its members still show discomfort with some economic data, though they have also ruled out an additional hike as the basecase scenario. The main question now is the timing of the monetary easing expected for 2026, for which the Copom has not given many signals. On the one hand, easing inflation and economic slowdown could contribute to a first 25-bp cut in January, but a robust labor market combined with the income tax reform -- which will increase disposable income -- could delay the cut to March. Given Galípolo's comments about a conservative committee facing uncertainties and the Copom's mention in its latest minutes that its forecasts for the impact of the income tax reform are still highly uncertain, we still believe the committee may opt to cut the rate not in January, but at its next sitting in March. However, the December minutes will likely give about the timing of the potential easing cycle.

Trump will either let USMCA expire or maybe work out another deal with Canada and Mexico (Global News)

Trump suggests he'll let the USMCA expire and will instead seek a new agreement with Mexico and Canada (El Sol de México)

Senate appoints Ernestina Godoy as the new head of the General Attorney Office (El Economista)

Senate picks Ernestina Godoy to head the General Attorney Office in an express process, opposition accuses the appointment was decided beforehand (Animal Político)

Treasury aims to squeeze tax collection in 2026 (El Financiero)

Minimum wage to increase 13% in 2026 (Animal Político)

Minimum wage to increase 13% in 2026, but 5% in Border States (El Financiero)

This is the gradual reduction to the labor week to fall to 40hrs in Mexico (El Sol de México)

Coparmex business group says the minimum wage will reach the family-wellbeing-threshold in 2026 (El Economista)

Sheinbaum and business leaders create investment council (Reforma)

US oil imports from Mexico fall to a historic low (Expansión)

MORENA attempts to pass the Water Law reform in fast-track (Político MX)

Farmers give lawmakers their demands regarding the reform to the Water Law (La Jornada)

House of deputies' committee approves Water Law reform proposal (La Razón)

Sheinbaum confirms her participation in the World Cup draw in Washington (La Jornada)

• Appointment of a loyalist was expected, gives president tighter control of this key office
• Godoy's appointment was fully expected after she assumed as acting attorney general last week

The Senate appointed Ernestina Godoy as Attorney General on Wednesday. The appointment was expected after she assumed as acting Attorney General last week, following an unreported move in the last day in office of ex-attorney Alejandro Gertz. Still, the speed of her appointment is surprising to us, considering the tired process determined in the constitution. Indeed, the Senate and President Claudia Sheinbaum collaborated to speed up the appointment to have the position vacant less than a week.

Overall, we fully expected the president to gain tighter control of this key office with the resignation of former attorney Gertz; indeed, the arrival of Godoy, a close ally of Pres Sheinbaum, gives the presidency stronger control of this technically-autonomous institution. This continues to confirm the power of the MORENA regime and President Sheinbaum. Indeed, although Gertz was a questionable figure, accused of corruption and of using the prosecution office to persecute personal enemies, he had been confirmed by a plural senate, not personally handpicked by ex-Pres Andrés López as a personal ally.

• Govt to present reform cutting labor week from 48hrs to 46 in 2027
• To cut labor week by 2hrs every week
• Policy was demanded but should have an impact on inflation and competitiveness

The government will be presenting Congress a reform cutting the labor week from 48 to 40hrs, President Claudia Sheinbaum announced on Wednesday. The cut will be gradual, 2hrs per year starting in 2027.

Overall, the reform should have been expected by the market, considering social pressure and MORENA's commitment to cut the labor week. Still, the reform will have a negative impact on competitiveness and inflation, starting in 2027. In our view, the graduality of the reform is welcomed; however, the effect industry to industry might be heterogeneous, considering many industries need to cover full shifts. Our best guess is that some industries will be favored by the graduality, with a slow but constant positive impact on employment through the 4-year term on which it will be enforced.

• Claims hike does not have an inflationary impact
• We find this claim to be baseless
• Unsurprising hike brings inflationary pressures, should fuel wait-and-see approach at the CB

President Claudia Sheinbaum announced on Wednesday that the minimum wage will increase by 13% in 2026. The hike is unsurprising, consistent with the rapid revision of the minimum wage since the Andrés López administration.

Pres Sheinbaum claimed the hike will not have an inflationary impact. We believe this claim is baseless. We fully expect upward pressure from the movement, although the pressure should not be a surprise to either the market or the CB and, thus, it should not come with revisions to mid-term projections.

Overall, the minimum wage hike will pressure core inflation up to start the year, with a likely impact on core inflation. We are particularly concerned about the inflationary impact the movement will have on service inflation, which is already high in late 2025, at 4.44% y/y in October. Along with this inflationary pressure, the move should help fuel private demand at a time when it stands as the more relevant component of aggregate demand and economic growth. Finally, the hike and its inflationary impact should add pressure on the CB to assume a wait-and-see approach to start 2026, holding the Monetary Policy Rate at 7.00% through Q1 while it assess the full inflationary impact of the hike, tax hikes on sugary drinks, tobacco and videogames, and tariffs imposed on goods coming from countries with which Mexico lacks a free trade agreement.

• Decline shows deceleration in late 2025, in line with weak outlook
• Domestic sales stagnate, up 0.1% y/y in Jan-Nov

Domestic auto sales fell by 0.3% y/y in November, per data published on Wednesday by the stats office INEGI. This is a disappointing swing from a 6.0% y/y hike posted in October. Thus, the deterioration shows the October improvement was probably transitory and not a signal of accelerating demand in late 2025, in line with a weak growth outlook.

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Domestic sales reached 1.35mn units in Jan-Nov, up by 0.1% y/y. This relative stagnation is consistent with a relatively poor economic outlook, considering weak growth and modest growth expectations ahead, along with reigning uncertainty. On the other hand, this stagnation compares negatively with the labor market resilience, monetary easing and strong credit availability.

Overall, poor performance by domestic auto sales in 2025 is consistent with a context of uncertainty and weak growth. Strong recovery in 2026 is unlikely, in our view. However, a modest acceleration of the economy along with fading uncertainty and lower interest rates should set the scene for more positive performance next year, in our view.

• Next MPC meeting: December 18
• Current policy rate: 7.25%
• EmergingMarketWatch forecast: 25bps cut

Four of five members of the Monetary Policy Council (MPC) retook a dovish discourse in their quarterly report presentation last week. The board defended the credibility of its CPI inflation forecasts, which continue to significantly diverge from market's expectations. Most of the positions made following the presentation were in response to a journalist quoting CB Deputy Governor who said CB's CPI inflation forecasts are not credible.

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Some in the market may see this dovish tone as a correction from a less dovish minute. However, we believe this is the board closing lines to defend the credibility of its projections rather than any forward guidance. The defense of CPI inflation expectations is a defense of already applied monetary easing, in our view, rather than a defense of monetary easing persisting in 2026.

The CB insisted in its quarterly report presentation that weaker growth expectations should ease inflationary pressure in the mid-term. In line, the CB cut its 2025 GDP growth forecast to 0.3%, below all onlookers and the market consensus. We expect the market to follow, after a disappointing Q3 GDP print, which came with a negative revision of H1 results. However, we doubt the market will be revising its 2025 CPI inflation forecasts significantly, surely remaining far from the CB's expectation of inflation converging to its 3.00% punctual target by Q3.

We remind CPI inflation disappointed in November H1, coming at 3.61% y/y. The hike came on lingering pressure, with core inflation holding at 4.32% y/y for the second fortnight in a row, tying the worst result recorded since April 2024. We insist, as deputy governor Heath warns, that the CB should be focusing on the pace of core inflation, rather than highlighting the pace of general inflation, considering total inflation has slowed thanks to non-core inflation, which tends to be volatile and does not follow the CB's monetary policy. The fact core inflation remains so high shows CPI inflation is in no path to converge to the CB's 3.00% target anytime soon, in our view.

Besides poor performance so far, there is reason to expect further inflationary pressures in early 2026. The minimum wage increase, likely at 12%, will have a new impact on inflation that should not fade through the year, although weak economic growth might contain the impact to a point. Higher taxes on sugary drinks, tobacco and videogames should have a one-off impact. While increased tariffs on countries with which Mexico does not have a free trade agreement should have a punctual but significant inflationary impact, in our view. However, most of the board has failed to discuss these factors in presentations and in the latest sitting. It remains to be seen if the bulk of the board will begin to ponder these factors in the December sitting.

Amid this inflationary pressure, we are confident the dovish board will cut its Monetary Policy Rate (MPR) by 25bps this month, bringing it down to 7.00%. Deputy Governor Heath agrees with this projection, although he highlights this new cut won't be unanimous, again. We expect this cut to come from a 4 to 1 vote, with Deputy Governor Heath remaining the lone opposition to the ongoing easing cycle. However, there is a modest chance that another board member were to join Heath, bringing a new rate cut from a 3-2 vote.

Our mid-term policy rate projection was significantly affected by the latest sitting minute; in our view, this minute shows the dovish majority cracking. Three board members did not commit to constant easing ahead, suggesting a pause is likely ahead. We now expect such pause to come starting in the first 2026 sitting, scheduled for February. This is a significant correction in our projections, considering we anticipated easing of up to 50bps in Q1 2026 and, now, we won't be too surprised if no easing comes in Q1 at all. Our 2026 projections will still depend on the tone used in the upcoming cut and the minute to be published in early January.

In our view, a wait and see approach in early 2026 makes sense, particularly because of lingering inflationary pressures and new ones on the horizon. Dovish tendencies dominating the CB keep the door open to further monetary easing in 2026, in our view. We doubt this easing could exceed 75bps through the year, anticipating lingering inflationary pressures and new ones described above. Still, we now expect any easing to come after Q1, pausing the cycle to assess its impact on core inflation.

Overall, we are confident the CB will cut its policy rate by 25bps in December, bringing down the policy rate to 7.00%. We expect further easing in 2026. However, we expect a pause to the easing cycle since the first 2026 sitting, considering a less dovish tone by the CB's board. The latest minute shows a significant change in tone from a very dovish board; however, the tone of the December sitting will be crucial to assess how much easing the CB will end up favoring through 2026. Given the change in tone, it won't surprise us if the CB does not cut its policy rate in Q1.

• Minimum decline breaks a three-month recovering trend
• Private consumption grows 3.6% y/y still, on a weaker base
• y/y improvement comes nearly across the board, consumption of imported goods jumps 14.8% y/y

Domestic private consumption stagnated in September, falling by 0.01% m/m, per seasonally adjusted data published by the stats office INEGI on Wednesday. This is the first contraction in four months, not nearly walking back the improvement seen since the turn of the semester.

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Non-adjusted data show private consumption up by 3.6% y/y, accelerating m/m on a weaker base. The hike came nearly across the board, with the consumption of imported goods up by 14.8% y/y. Importantly, the consumption of domestic goods grew by 1.6% y/y, breaking a three-month negative trend, again on a base effect.

Overall, private consumption surprised in Jun-Aug with steady growth despite some adversity in the context, including weak growth expectations and reigning uncertainty. This upholds private consumption as the economy's main driver in 2025, particularly as fiscal consolidation efforts persist and as investment suffers under said reigning uncertainty.

• Machinery and equipment investment rebounds, up 1.92% m/m sa
• GFI declines 6.7% y/y in September, easing its plunge
• Construction investment continues to worsen, residential component posts first fall in five months

Gross Fixed Investment (GFI) fell by 0.31% m/m in September, per seasonally adjusted data published by the stats office INEGI on Wednesday. This contraction came on the back of the construction component, which added its fourth decline in a row and continues to show severe deterioration since, at least, late 2023. However, investment in machinery and equipment rebounded by 1.92% m/m sa in September, partially offsetting the contraction posted in August.

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GFI fell by 6.7% y/y in September, posting the more modest contraction of the last four months, showing sharp deterioration since the turn of the semester. The plunge was mostly driven by construction, down 10.6% y/y. Worryingly, this was the first time residential construction fell in the last five months, suggesting investment may be falling in a generalized mode in the last months of the year.

Overall, investment is suffering in 2025 amid reigning uncertainty and weak growth expectations. The construction investment contraction is in part explained by a base effect, in our view, after GFI skyrocketed because of nearshoring hopes. Indeed, we see little reason to anticipate any recovery later in the year or in 2026, as uncertainty remains high, aggravated by a looming revision of the US-Mexico-Canada Agreement (USMCA).

• IMF has updated 2025 traffic figures, which show more favourable dynamics
• Transit volume fell 4% y/y in Jan-Nov, previous figures showed 15% y/y drop
• We estimate Egypt lost USD 4.4bn revenue to insecurity during Jan-Nov

The total number of tankers and cargo ships passing through the Suez Canal rose by marginal 0.2% m/m to 1,275 in November, following a 1.7% m/m increase in October, according to revised data from IMF's PortWatch platform. We note that the data revision was substantial and shows a much better outturn for 2025 than previously expected. The November figure is the highest since January 2024 and if we adjust for the fewer days of November, the increase would be sharper 3.6% m/m. The steady increase in ships passing through the Canal in recent months signals some improvement after nearly two years of insecurity in the Red Sea that has been dragging on the Suez Canal. In y/y terms, the number of ships rose for the third month in a row, rising by sharp 18% y/y - albeit from a low base - and the 7-day moving average rose to 43 ships on November 30 from 36 on the same day a year ago.

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The revised figures show that the number of ships fell by 4% y/y in Jan-Nov, while previous data showed the decline was around 15% y/y. Consequently, we have revised our revenue estimates, and we now think Egypt lost USD 4.4bn in Suez Canal revenues since the start of the year (previously: USD 6bn). According to our revised estimates, Egypt lost USD 4.6bn to insecurity in the Red Sea in 2024 (previously: USD 6bn), although the government said the lost revenue was closer to USD 8bn. The government's estimate is equal to about 2.0% of GDP and accounts for about 17% of CBE's foreign reserves, underlining the severe impact of the Red Sea attacks on Egypt's economy. The outlook for 2025 and 2026 is now brighter than just a couple of months ago, but we still do not expect a significant improvement in traffic through the canal before mid-2026.

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• This package focuses on incentives and benefits for tax compliance, including White List
• Egypt to replace Capital Gain Tax with simpler 0.125% Stamp Duty,

FinMin Kouckouk unveiled on Wednesday (Dec 3) the second package of tax facilities, which includes investment incentives, streamlined tax refund procedures, and unified and simplified taxes, and more. The first package, which was introduced last year and aimed at simplifying the tax procedures, and the second one focuses on incentives and benefits for tax compliance. Kouchouk explained that the new package will offer a White List, Excellence Card, priority access to specialized services, and additional incentives for compliant taxpayers. He also mentioned the restructuring of VAT refund departments to simplify and expedite procedures, ensuring quick refunds within a week for those on the White List, as well as increasing the number of cases and refund amounts. The finance minister said that VAT refunds jumped 151% y/y to EGP 7.2bn in 204/25, with plans to further increase that figure to support business liquidity.

FinMin Kouchouk revealed that the government is in the final stages of a low-cost financing program aimed at boosting investments, especially for SMEs. Egypt will also start allowing interest on project-related loans to be deducted from taxable income, reducing financing costs and improving project feasibility, in a bid to boost private sector participation in strategic projects.

In a move to support the healthcare sector, Kouchouk announced new legislation to reduce VAT on medical devices to 5% from the current 14%. The package also includes a full VAT exemption for components and supplies used in dialysis and kidney filters. To further encourage investment, the suspension period for VAT payment on machinery and medical equipment will be extended to four years.

Other measures aimed at streamlining administration include:

• Real Estate: A set tax of 2.5% on the sale value of property units, applicable regardless of the number of disposals, with a new mobile application to facilitate payments.
• Small Business: Continuation of the simplified tax system for businesses with an annual turnover not exceeding EGP 20mn.
• Company Liquidation: A new electronic system to process company closures and liquidations as quickly as possible.
• Disputes: A proposal to renew the Tax Dispute Resolution Law and improve internal committees to resolve issues faster.

Capital Gains Tax will be finally replaced by Stamp Duty

Egypt also plans to replace the Capital Gains Tax with a Stamp Duty to encourage institutional investment in the EGX. The capital gains tax reform has been in the works for several years now. Unnamed government officials told the local press earlier this year, the finance ministry projects EGP 722mn tax revenue from the unified 0.125% Stamp Duty in FY 2025/26.

Egypt, China ink MoU to boost agricultural research cooperation (Zawya)

Egypt denies any agreement to reopen Rafah crossing for Gaza departures (Ahram)

Factbox: CBE flags resilient external position of Egypt economy (Ahram)

Volkswagen unveils USD 240mn plan to expand electric car manufacturing in Egypt (Ahram)

Greek business delegation in Cairo explores new trade, investment opportunities (Ahram)

Kuwait Extends USD 2bn Deposit in Egypt for Additional Year (Sada Elbalad)

Egypt to implement second tax incentives package by June 2025 (Egypt Today)

IMF starts Fifth, Sixth reviews of Egypt's economic reforms: Prime Minister (Egypt Today)

Egypt-Greece trade hits USD 2bn: GAFI (Daily News Egypt)

Egypt, Bulgaria sign protocol to expand economic ties across 19 sectors (Daily News Egypt)

Egypt to swap capital gains for stamp duty to boost stock market investment (Daily News Egypt)

Egypt's PM cites optimism on IMF reviews as economic indicators beat targets (Daily News Egypt)

New rental tiers leave 1.6 million old-rent tenants in Egypt in limbo (Egypt Business)

• Lawmakers questioned him on major security lapses
• Musa vowed tougher action against criminal groups

The senate confirmed former chief of defence staff Christopher Musa as Nigeria's new minister of defence on Wednesday (Dec 3). His confirmation via a vote followed an extensive screening that lasted five hours, during which lawmakers questioned him on security challenges and national defence priorities. During the session, Musa criticised negotiations with bandits and pledged to intensify efforts to combat criminal groups across the country.

Musa brings more than three decades of military experience to the role. He became chief of defence staff in June 2023 and retired from the military in Oct 2025. Musa was nominated for defence minister by president Bola Tinubu on Tuesday, replacing former minister Badaru Abubakar who resigned on Monday due to health issues. Tinubu expressed confidence in Musa's ability to strengthen Nigeria's defence against rising banditry, kidnappings and communal clashes.

FG unveils NGN 54.43tn budget as debt service gulps NGN 15.91tn (The Punch)

GDP expected to rebound 4.22% in Q4 -Report (The Punch)

CBN ends cash deposit limit for bank customers (The Punch)

FIRS clarifies new tax laws, debunks levy misconceptions (The Punch)

AMCON repays NGN 3.6tn, intensifies global asset hunt (The Punch)

Abduction crisis: NASS asks FG to name terrorism financiers (The Punch)

Insecurity: NEC Approves NGN 100 Billion for Repairing Training Institutions for Security (ThisDay)

Report: Nigeria's Cyber Attack Breaches Surge 1,047% in Q3 (ThisDay)

Crypto tax may push Nigerian traders to P2P, stakeholders warn ahead of 2026 (Nairametrics)

Nigerian equities market gains NGN 252.1 billion driven by Guinness, Tier-1 banks (Nairametrics)

CBN's new cash limit policy sparks reactions from experts, PoS operators (Nairametrics)

• GDP growth is projected at 4.7% next yar, FX rate is set at USD/NGN 1,512
• MTEF sets 2 oil production targets: 2.06mn bpd for industry to pursue and 1.8mn bpd for fiscal planning
• Fiscal deficit is expected at NGN 20.1tn (3.61% of GDP)
• MTEF will be sent to national assembly by Dec 8

The federal executive council on Wednesday (Dec 3) approved the 2026-2028 Medium-Term Expenditure Framework (MTEF) and Fiscal Strategy Paper. The new MTEF is anchored on an oil price benchmark of USD 64.85 per barrel and a budget exchange rate of USD/NGN 1,512 for 2026. Budget minister Atiku Bagudu noted that with 2026 being a pre-election year, heightened political spending could exert pressure on the exchange rate. The framework introduces two oil production figures: an ambitious target of 2.06mn bpd for the industry to pursue, and a lower benchmark of 1.8mn bpd for budgeting, adopted to avoid revenue shortfalls.

The macro assumptions for 2026 also include a projected growth rate of 4.68%. Nigeria's nominal GDP is projected at about NGN 690tn in 2026, rising to NGN 890.6tn by 2028. Non-oil GDP is expected to expand from NGN 550.7tn to NGN 871.3tn over the period, while oil GDP is projected to grow from NGN 557.4tn to NGN 893.5tn.

The revenue projections for 2026 place gross federation revenue at NGN 50.74tn, of which the federal government will receive NGN 22.6tn, the states NGN 16.3tn and local governments NGN 11.85tn. Total federal government revenue from all sources is estimated at NGN 34.33tn, including NGN 4.98tn from government-owned enterprises. This is about 16% lower than the 2025 estimate. Major expenditure items comprise approximately NGN 3tn in statutory transfers, NGN 15.91tn for debt service and NGN 15.27tn for non-debt recurrent spending. The projected deficit is NGN 20.1tn (equivalent to 3.61% of GDP). The implied federal spending envelope stands at roughly NGN 54.43tn.

Briefing journalists after Wednesday's council meeting, budget minister Atiku Bagudu said the MTEF was prepared with inputs from MDAs, the private sector, civil society and development partners. It will be transmitted to the national assembly no later than Dec 8.

• Increase is attributed to stronger portfolio inflows and oil receipts
• Reserve level is the highest since July 2019
• Total rise in 2025 stands at USD 3.79bn from Dec's USD 40.88bn

The gross external reserves of the central bank (CBN) rose by USD 1.47bn or 3.4% m/m to USD 44.67bn as of end-November, after growing by 2% m/m the month before, according to CBN data. This is the country's highest level of reserves since July 2019 (USD 44.9bn). Reserves are up by a net of NGN 3.79bn this year, from USD 40.88bn at the end of December 2024. The CBN attributes the improvement to stronger portfolio inflows, improved oil receipts and a more stable balance-of-payments position. At a recent forum, CBN governor Olayemi Cardoso described November's reserve level (more than 10 months import cover) as a milestone in the bank's reform programme. He also highlighted that the narrowing gap between official and parallel exchange rates reflects renewed market confidence.

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Despite declining global oil prices and concerns that Brent could fall towards USD 50 per barrel, analysts note that Nigeria is strengthening its position through non-oil export promotion, diaspora remittance reforms and backward integration strategies. CBN reforms have earned recognition from global rating agencies, with Fitch, Moody's and S&P upgrading Nigeria's rating or improving the outlook this year, partly in response to better FX transparency and rising reserves. Nigeria's external reserves are expected to maintain their upward trajectory in the final month of 2025.

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• FY27 growth expected at 6.4%; FY28 at 6.2% y/y
• Inflation to return to 4% by end-2026
• One more rate cut expected from RBI in December, followed by prolonged pause

Fitch Ratings has revised India's FY26 GDP growth projection upward to 7.4%, from its earlier estimate of 6.9%, citing stronger-than-expected consumer spending and the early positive impact of recent GST simplification reforms. The upgrade follows official data showing India's economy expanded 8.2% in Q2 FY26-its fastest pace in six quarters-up from 5.6% a year earlier.

According to the agency, private consumption is the dominant driver of FY26 growth. Real income gains, improved consumer sentiment, and favourable tax dynamics are all supporting household spending. Fitch added that India's elevated effective tariff rates (ETRs) remain a drag on export competitiveness, but a potential trade agreement with the US could materially boost external demand.

On the price front, Fitch noted that core inflation has held above 4%, though much of this firmness is linked to high global prices of gold and silver. The agency expects base effects to push headline inflation above the 4% target by end-2026, with only a mild easing anticipated in 2027. With inflation sharply down, Fitch believes the RBI has room for one final policy rate cut in December, trimming the repo rate from 5.5% to 5.25%. This follows 100 bps of cumulative cuts in 2025 and reductions in the cash reserve ratio from 4% to 3%. However, the rating agency expects the RBI to hold rates steady at 5.25% for the next two years, given a likely rebound in core inflation and continued strength in economic activity.

Fitch has lowered its FY27 GDP forecast to 6.4%, saying growth will moderate as public investment slows under a tighter fiscal stance. Private investment is expected to pick up in the second half of FY27, helped by easier financial conditions, while private consumption is projected to cool as rising inflation erodes household purchasing power. Net trade is expected to add positively to growth, with import growth normalising after a strong rebound in FY26.

For FY28, Fitch expects the economy to expand 6.2%, noting that stronger domestic demand will be partly offset by faster import growth. The agency highlighted that India faces one of the highest effective tariff rates on exports to the US-around 35%, and stressed that a bilateral trade agreement reducing this burden would meaningfully lift India's export outlook.

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Rupee floating at 90: Inflation and fiscal risks seen manageable for now (Financial Express)

RBI MPC Day 2: Rupee at Record Low, Strong GDP, Soft Inflation - Cut or Pause? (Financial Express)

PM Modi to host private dinner for Russian President Vladimir Putin today (Business Standard)

Sensex jumps 300 pts; Nifty above 26,050 (Economic Times)

Parliament winter session: FM Sitharaman to move Health Security National Security Cess Bill for consideration, passing in LS (Economic Times)

India, Canada discuss contours, modalities to launch trade pact talks (Economic Times)

Putin's India visit: Russian President to meet PM Modi today (The Hindu)

From nuclear cooperation to defence, trade to oil, what is expected from Putin's two-day India visit (theprint.in)

Industry hopeful of 25 bps rate cut in upcoming RBI policy, says FICCI (CNBC TV18)

• Export demand softened during the month
• Input cost inflation fell to lowest level since 2020
• Overall demand conditions remain positive

India's services industry regained momentum in November, with activity expanding at a faster pace after a brief moderation in October. The HSBC India Services PMI rose from 58.9 in October to 59.8, signalling a robust improvement in business activity driven by stronger domestic demand and a sharper rise in new orders. Firms reported broad-based increases in client enquiries and contract wins, pushing new business growth above its long-run average.

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Export demand, however, softened. New international sales continued to rise but at an eight-month low, with companies citing tougher global competition and cheaper service offerings in rival markets across Asia, Europe and the Middle East. Even so, overall demand conditions remained positive, supported by an easing of inflationary pressures.

Input cost inflation fell to its lowest level since mid-2020, helping firms limit price hikes to customers. Only a small proportion of service providers raised fees in November, leading to the weakest output price inflation in more than four years. Companies attributed marginal increases in expenses to electricity, food, rent and software subscriptions.

Hiring activity picked up slightly, though job creation remained moderate as firms faced no significant capacity pressure. Backlogs were broadly unchanged after a mild decline in October. Business confidence slipped to a multi-month low due to concerns about competition and potential disruptions from state elections, though firms still expect output to grow, supported by marketing efforts and restrained price increases.

Meanwhile, the HSBC India Composite PMI fell from 60.4 in October to 59.7 in November, indicating sustained but slightly softer expansion. While manufacturing output and new orders eased, services posted clear accelerations. Crucially, input cost inflation across both sectors moderated to its weakest in more than five years, easing charge inflation across the economy.

• Centre aims for nationwide implementation by FY27
• Standard 8-hour workday remains unchanged in new law
• Four longer workdays permitted followed by three paid days off
• Gig workers may gain access to benefits

Labour and Employment Minister Mansukh Mandaviya speaking at an industry event earlier today said the government will soon re-publish draft rules under the four national labour codes, paving the way for the long-awaited reforms to become fully operational by the start of FY27. He added that the earlier draft rules - released several years ago - now require revisions to reflect current workplace realities and emerging forms of employment.

The four codes - Code on Wages (2019), Industrial Relations Code (2020), Code on Social Security (2020) and the Occupational Safety, Health and Working Conditions Code (2020) - were officially notified on November 21, consolidating 29 separate labour laws into a streamlined framework aimed at modernising India's labour market.

Mandaviya said the revised draft rules will be issued for 45 days of public consultation, after which the Centre will finalise and notify them. He cautioned, however, that since labour is a concurrent subject, the codes will only become operational nationwide once state governments notify their respective rules. States retain flexibility to adapt implementation to local economic and sectoral conditions.

Responding to industry questions, the minister clarified that the standard eight-hour workday remains unchanged under the new framework. The updated codes allow overtime provisions in line with global norms, including the option of 8-12 hour shifts capped at 48 hours per week. This permits four longer workdays followed by three paid days off-an arrangement that businesses have sought to enhance productivity while preserving worker protections.

Mandaviya also highlighted the government's ambition to extend social security coverage to one billion workers by March 2026, up from the current 940mn. India's social security net has expanded rapidly-from 19% of the workforce in 2015 to 64.3% in 2025-driven partly by the formal recognition of gig and platform workers in the Code on Social Security. These workers, whose numbers may rise from 10mn in 2024-25 to 23.5mn by 2029-30, will gain access to new welfare schemes covering health, pensions, disability support and education benefits.

• The move underscores India's multi-alignment geopol strategy
• Collaboration to extend to large reactors and small modular reactors
• DAE to build first demonstration unit with a timeline of 60-72 months

New Delhi and Moscow are exploring the possibility of manufacturing Russia-designed small modular reactors (SMRs) in India, the government informed parliament earlier today. The talks mark a potential new phase in bilateral nuclear cooperation beyond the ongoing Kudankulam project. Minister of State for the Department of Atomic Energy (DAE) Jitendra Singh informed the parliament in a written response that officials from the DAE and Russia's nuclear corporation Rosatom recently held discussions on expanding collaboration across large reactors, SMRs and the broader nuclear fuel cycle.

The initiative dovetails with the government's Nuclear Energy Mission, announced in the 2025-26 budget, which targets the development and deployment of five indigenous SMRs by 2033 under an INR 200bn programme. The Bhabha Atomic Research Centre is already designing multiple variants: a 200 MW Bharat SMR, a 55 MW SMR, and a 5 MW high-temperature gas-cooled reactor intended for hydrogen production.

Singh added that the DAE plans to build the first demonstration units at its own sites once project sanctions are secured, with construction timelines estimated at 60-72 months. Separately, the Nuclear Power Corporation of India Ltd (NPCIL) has extended the deadline for industry proposals under its December 2024 RFP for captive SMR deployment, now due in March 2026. He also confirmed that the long-awaited Atomic Energy Bill 2025 is nearing completion, with inter-ministerial comments and legal vetting being incorporated before the draft is submitted for approval.

From a strategic perspective, collaboration with Russia on SMRs could accelerate India's clean-energy transition and reduce long-term import dependence on fossil fuels. Geopolitically, deepening civil-nuclear ties with Moscow further underscores India's multi-alignment strategy at a moment when U.S.-Russia tensions continue to reshape global technology partnerships.

Sumatra Floods Leave 776 Dead, Hundreds Missing, Millions Displaced (Jakarta Globe)

Indonesia Denies Poison Pill Clause Stalling US Tariff Talks (Jakarta Globe)

NU faces money laundering allegations amid internal rift (The Jakarta Post)

Indonesia races to restore roads after Sumatra floods (Antara News)

Prabowo approves extra emergency funds for flood-hit Sumatra (Antara News)

Finance Minister Purbaya Confirms He Will Provide Incentives to Retail Investors After the OJK Cleans Up "Fried Stocks" (Jawa Pos)

Governor Pramono Says Food Prices in Jakarta Remain Stable Ahead of Christmas and New Year 2026 (Koran Jakarta)

4,000 Hectares of Rice Fields Threatened by Crop Failure Due to Disasters on Sumatra Island (Media Indonesia)

• Indonesia still lags behind regional peers Malaysia, Singapore in semiconductor production

A consortium of Indonesian, German and US companies pledged to invest USD 26.7bn in semiconductor, silica sand, and advanced glass industries in Batam, Riau Islands, the Jakarta Globe reported. Investment is projected to begin soon in the Wiraraja Green Renewable Energy Park, where semiconductor and high-tech glass manufacturing plants will be constructed, the head of the combined investment entity Walter William Grieves said.

The government has pledged to expedite all permits to speed up the investment process. We remind that Indonesia aims to catch up with neighbours Malaysia and Singapore in the development of its semiconductor industry. So far, Malaysia and Singapore both rank in the top 10 semiconductor producers worldwide, while Indonesia is lagging behind, with regulatory hurdles a major stumbling block to the development of high-value-added industries, including semiconductors.

• Local think-tank Celios estimates floods' impact at USD 4.1bn
• Govt counts on fiscal stimulus to boost GDP growth to 5.2-5.4% y/y in Q4
• We are skeptical about govt's Q4 forecast, especially given impact of natural disasters

The government will consider the Sumatra floods before deciding whether to revise its GDP growth forecast, EconMin Airlangga Hartarto said. The government is now focused on emergency response, while the economic consequences will be considered at a later stage, he added. The comments came after the local think-tank Celios projected the floods could shed IDR 68.7tn, or USD 4.1bn, from Indonesia's GDP this year.

We remind that the government projects 5.4-5.6% GDP growth in Q4, while it aims for 5.2% economic expansion in 2025. So far, the economy has grown by 5.01% y/y in Jan-Sep, with GDP growth slowing to 5.04% y/y in Q3 from 5.12% y/y in Q2. However, the government counts on its two fiscal stimulus packages worth IDR 43tn in Q4 to boost GDP growth in the final quarter of the year.

Overall, we are skeptic that economic growth will meet the government's expectations in Q4, particularly given the impact of the natural disasters during the quarter. At any rate, the fiscal stimulus will certainly help mitigate the impact of the floods on private consumption to an extent, though GDP growth could slip below the 5% long-term average, in our view.

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• Reduced acreage and flood damage weigh on output, especially in Punjab
• Textile mills boost imports to cover supply gap

Cotton arrivals at ginning factories, a proxy for cotton output, fell by 1.1% y/y to 5.1mn bales as of Nov 30 in the 2025-26 season, media reported, citing latest data from Pakistan Cot­ton Ginners Association. Analysts attributed the decline to a reduction in area under cotton cultivation as farmers shift to more profitable crops like sugarcane and rice amid the absence of the government's minimum support price for cotton. In addition, monsoon floods have also affected cotton crops, with preliminary assessment putting damages at around 3.4mn bales. Punjab, the province most affected by the floods, recorded a 4.5% y/y decline in cotton output to 2.3mn bales. In contrast, production in Sindh edged up 2.0% y/y to 2.6mn bales.

With most of the harvesting now complete, cotton output is expected to reach around 5.5mn bales in the 2025-26 season. This would mark a second consecutive annual decline in production, following a 30.7% dip to 7.1mn bales in the 2024-25 season.

Consequently, cotton imports are likely to increase, given that the domestic textile industry requires around 10mn bales annually. According to Pakistan Bureau of Statistics data, the country imported nearly 0.3mn metric tonnes of cotton worth USD 529.7mn during Jul-Oct of FY26, up 139.3% y/y in volume but down 20.1% y/y in value, reflecting lower global cotton prices.

Rs13bn telecom projects okayed to connect 5.5m rural residents (Dawn)

Flat cotton output triggers calls for policy reforms (Dawn)

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PM announces live broadcast of PIA bidding process on December 23 (Express Tribune)

Centre proposes provincial share cuts ahead of crucial NFC talks (Express Tribune)

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Lahore regains tag of world's most polluted city (www.thenews.pk)

Refinery upliftment jumps 40pc YoY in November (www.thenews.pk)

PMD warns below-normal rainfall (www.thenews.pk)

Business confidence in Pakistan surges to +22 pc: OICCI Survey (Business Recorder)

Pakistan's external debt-to-GDP ratio drops to 26% in FY25 (Business Recorder)

Pakistan to open Torkham, Chaman border crossings with Afghanistan for UN cargoes (www.geo.tv)

• Bidding process will be broadcast live
• Four consortia in race to acquire the airline

The government will hold bidding for the privatisation of Pakistan International Airlines (PIA) on December 23, state media PTV reported, quoting PM Shehbaz Sharif. The bidding process will be broadcast live.

The government is aiming to sell a majority stake in PIA as part of its IMF-backed privatisation push to reduce the fiscal burden and improve public service provision. Four consortia have been pre-qualified to bid for the airline, which posted its first profit in more than two decades in H1 2025. The report noted that Shehbaz held a meeting with all corporate entities and company representatives participating in the privatisation process.

If successful, this would be Pakistan's first major privatisation in nearly two decades. With around 80% of PIA's debt already transferred to the government's books, the resumption of flights to the EU and the UK, and additional investor incentives such as tax exemptions, the prospects for a successful sale appear strong.

• Next policy meeting: Dec 4, 2025
• Current policy rate: 11.0%
• Last decision: Hold (Oct 27)
• Our forecast: Hold
• Rationale: Inflation is likely to exceed SBP's target range. Meanwhile, domestic demand shows sustained recovery

We expect the State Bank of Pakistan (SBP) to maintain the policy rate at 11.0% in its Dec 15 meeting. This would mark the fifth straight meeting in which the central bank keeps the key rate steady, following a 1,100bps reduction between June 2024 and May 2025.

Inflation is expected to breach the 5%-7% target range over the next two quarters, primarily due to the low base effect, geopolitical tensions, and a likely upward adjustment in the administered gas tariff. While the external sector remains stable, supported by robust remittances, loan inflows and low global commodity prices, concerns are resurfacing over the impact of a deteriorating trade balance on the external position. Meanwhile, largely unaffected by the recent floods, economic growth is gaining momentum, as evidenced by rising non-oil imports, strengthening private sector credit demand, and strong cement and vehicle sales.

The SBP is also expected to continue following recommendations from the IMF, which in October again urged the central bank to maintain an appropriately tight and data-dependent monetary policy to anchor inflation within the target range. The Fund's executive board will meet next week to approve the release of the next USD 1.2bn tranche under its two loan programmes.

Inflation environment

CPI inflation edged down to 6.1% y/y in November from a one-year high of 6.2% in October. The slight moderation was mainly driven by a decline in prices of perishable food items, particularly tomatoes. Nonetheless, the prolonged closure of the Afghan border - which has disrupted supplies of mainly fresh fruits, vegetables and coal - along with higher gas prices and elevated jewellery prices amid a rally in global gold markets kept the upward pressure on the headline figure. On a positive note, core inflation eased to a multiyear low of 6.6% y/y in urban areas, supported by subdued global oil prices and a strengthening Pakistani rupee against the US dollar.

Inflation has remained within the SBP's 5%-7% target range since September. However, the central bank previously projected that inflation could rise above the upper bound for "a few months" during Jan-Jun 2026. As a result, the real interest rate on a spot basis is expected to narrow - from around 5% at present to roughly 3.0%-3.5% in H1 2026. The SBP has emphasised the need to keep the real policy rate "adequately positive," in line with IMF guidance.

An increase in the minimum support price for wheat, a likely hike in gas tariffs from January, and volatile global commodity prices pose upside risks to the inflation outlook.

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GDP growth

Recent high-frequency indicators point to a sustained recovery in domestic demand. Non-oil and non-food imports reached a multiyear high of USD 3.9bn in October, total vehicle sales have posted double-digit growth since March last year, local cement dispatches rose 15% y/y during Jul-Nov, bank lending to households increased 13.8% y/y in October, and Manufacturing PMI moved into the expansionary territory in November.

These factors, along with resilient exports of textiles and garments, have supported the manufacturing sector, which grew 4.1% y/y in Q1 FY26. Moreover, major Kharif crop outputs are expected to exceed targets, while conditions for the Rabi crops are also seen as favourable, supporting the agriculture sector outlook.

In October, the SBP upgraded its GDP growth forecast, citing an improved macroeconomic outlook due to the lower-than-anticipated impact of the monsoon floods. Growth is now projected to reach the upper end of its earlier forecast range of 3.25%-4.25% in FY26, up from 3.0% in FY25. The central bank had previously expected GDP to come in near the lower end of the range.

The SBP's projection is more upbeat than the IMF's forecast of 3.25%-3.50% for the current fiscal year and is also above the World Bank's estimate of 3.0%.

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External sector

The current account swung into the negative zone, posting a deficit of USD 112mn in October. Workers' remittances remained solid but were more than offset by a sharp 53.9% y/y widening of goods trade deficit.

Despite the surge in imports, the SBP remains optimistic about the external sector, citing a contained current account deficit (estimated between 0-1% of GDP in FY26) and realisation of planned official inflows. The central bank projects its foreign exchange reserves to rise from USD 14.56bn as of November 21 to USD 15.5bn by end-December 2025, on the back of IMF loan disbursements. The reserves are seen reaching USD 17.8bn by end-June 2026.

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Conclusion

Overall, the SBP is likely to stand pat on the policy rate in its upcoming meeting. Inflation is expected to pick up while the fragile external sector stability faces threats from rising imports. Meanwhile, economic growth shows sustained recovery, limiting the scope for a rate cut.

Further Readings

Previous policy rate decisions

SBP's The State of Pakistan's Economy report

Latest IMF statement

• RRR cut not to boost lending, GDP growth, but BSP will consider it
• BSP has cut key rate by 175bps this year

BSP governor Eli M. Remolona Jr. sees the chance for another rate cut in December growing due to the slowdown in GDP growth. Speaking at a press conference, Remolona projected GDP growth to settle at 4-5% this year, we below the government's 5.5-6.5% forecast.

On the other hand, Remolona downplayed the impact of a possible Reserve Requirement Ratio (RRR) cut, although he admitted it is on the central bank's agenda. The BSP governor believes there is high liquidity in the banking system now, and another RRR cut would just increase it, without a significant impact on lending or economic growth.

We remind that the BSP has cut the key rate by cumulative 175bps this year, with the latest 25bp rate cut coming in October. The next MPC meeting is scheduled for Dec 11.

BSP: Slow growth raises rate cut odds (BusinessWorld)

PHL may grow below target until 2027 (BusinessWorld)

Peso sinks as BSP chief says weak growth may lead to another rate cut (BusinessWorld)

Stocks sink to two-week low on economic woes (BusinessWorld)

OECD trims Philippines growth forecast (Philstar)

Lawmaker urges ban on political dynasties amid corruption scandals (Philippine News Agency)

• Final consumption, investment growth seen slower than in June
• Net exports to contribute positively, due to export recovery, import slowdown
• CPI inflation to enter BSP's 2-4% target band in 2026-2027
• Fiscal deficit seen larger in 2025, to moderate in 2026-2027

The OECD cut its GDP growth forecast for the Philippines to 5.1% in 2026, down from 6.0% forecasted in June, according to the latest OECD Economic Outlook released in December. The slower growth reflects mostly downward revisions of the private and public consumption expectations, as well as investment.

On the other hand, export growth is seen much quicker than before, while import growth will be much slower, leading to a positive net exports contribution to GDP growth, which will partially offset the slowdown in final consumption and investment.

We should note that the OECD also trimmed its projection for the 2025 growth to 4.7%, down from 5.6% previously, again on account of a slowdown in public and private consumption. Looking forward, GDP growth will accelerate to 5.8% in 2027, boosted by stronger growth across all components.

On the price front, the OECD trimmed its CPI Inflation forecast to 1.6% this year, down from 2.0% projected in June. CPI inflation will gradually gain pace to 2.6% in 2026 and 3.0% in 2027, thus entering the BSP's 2-4% target band.

On the fiscal front, the fiscal deficit will be slightly higher than expected this year, but it is projected to consolidate over the forecast horizon. The debt-to-GDP ratio will also climb to 62.2% at end-225, before moderating over the next couple of years.