• Flood-related repairs likely boosted both building construction and civil engineering works
• New building permits fell by 18.3% y/y in December, 6.9% in 2024

Construction activity rose by 9.7% y/y (wda) in December, picking up from a 2.5% y/y increase in November, according to figures from the statistical office. Building construction provided the bigger upward drive, rising by 7.8% y/y in December, its strongest increase since early 2022. However, civil engineering works also had a noticeable contribution, as they expanded by 13.3% y/y.

Data Download

This is a one-off effect, however, as it is very likely related to repairs after the heavy floods that hit the country in last September. We suspect that building construction has increased so fast because of the same reason, as there were plenty of residential homes impacted by the floods in the east of the country. It is why building construction rose by as much as 6% m/m (sa) in December, something that doesn't occur that often. It is also why construction activity reported its first quarter of year-on-year increase since Q2 2022.

The outlook for the construction sector remains poor, however, as building permits fell by 18.3% y/y in December. The full-year decline of building permits was 6.9% in 2024, though arguably milder than the 10.1% fall in 2023. This has been an ongoing issue, and one of the major reasons for the deepening housing crisis in the country, as residential construction is far from sufficient to meet rising demand.

• Markets expected a CZK 5.3bn surplus
• The full-year surplus reached CZK 223.2bn in 2024, higher by 82.2%
• The automotive sector drove trade surplus improvement in 2024, though there was a base effect in play
• High energy prices in Europe may put pressure on the surplus in 2025

The external trade surplus reached CZK 6.8bn in December, rising by 46.6% y/y, according to figures from the statistical office. The print was stronger than market expectations that pointed towards a surplus of CZK 5.3bn. It brought the full-year trade surplus to CZK 223.2bn in 2024, higher by 82.2%. It was also the strongest 12m-rolling surplus in the past 3 months. In FOB/FOB terms, the trade surplus added up to CZK 22.7bn in December (up 18% y/y) and CZK 427.5bn in 2024 (up 35%). In seasonally adjusted terms, the trade surplus rose by 3.3% m/m.

Data Download

The improvement in the trade surplus in December was driven by trade with machinery & equipment, as well as energy goods. Machinery & equipment exports rose by as much as 6% y/y in December, while fuel exports jumped by 55.6% y/y, reflecting higher fuel prices (mostly diesel). Trade with motor vehicles also had a modest contribution, though automotive exports rose by only 0.1% y/y, and the improvement was primarily due to lower imports. The situation was different in the entire 2024, however, when motor vehicles were the primary growth driver. Yet, there is a base effect in play, most evident in Q3 2024, related to production interruptions in the summer of 2023. It led to a major year-on-year improvement in 2024, so the improvement is relatively misleading. Still, the trade surplus improved even when excluding automotive trade, mostly because of fuel exports.

Exports rose by 9.1% y/y in December, faster from a 3.4% y/y increase in November. The main reason was machinery & equipment, where exports rose by a steady 6% y/y, its fastest increase in Q4 2024. Related industries helped as well, in addition to exports of chemicals and fuels, but machinery & equipment was the main growth driver. Import growth was also steady, at 8.5% y/y in December, and faster by 3.2pps m/m. The increase was the strongest in manufactured articles, which includes apparel, which considering the steady performance of retail sales, could have been mostly apparel.

Overall, the improvement in the trade surplus reflects weaker domestic demand, particularly in manufacturing. Industrial output fell by 1.4% in 2024, and given that local producers are reliant on imported commodities and components, it has served as an automatic stabiliser. Energy prices were also lower, which contributed to lower energy imports. This could reverse in 2025, given that natural gas prices have started to rise again in Europe, though the situation is dynamic and uncertain.

• Markets expected a 3.5% y/y decline
• Manufacturing output fell by 3.1% y/y, a flat rate when compared to November
• However, it was misleading, as there were one-off effects related to invoicing for repair of machinery & equipment
• Without these, manufacturing output would have dived, as most major sectors performed worse
• New export orders fell by 0.6% y/y in December, even though export orders increased by 0.5% y/y
• Nominal wages rose by 7.2% y/y in December and 6.2% y/y in Q4 2024, which is in line with the latest CNB forecast
• The outlook remains gloomy, as we consider US trade tariffs imminent

Industrial output fell by 3% y/y (wda) in December, picking up slightly from a 2.7% y/y fall in November, according to figures from the statistical office. Despite the deterioration, the print was slightly better than market expectations, which pointed towards a 3.5% y/y decline. Performance did improve in seasonally adjusted terms, rising by 1.6% m/m (sa) in December, with manufacturing rising by 1.9% m/m. Industrial output decreased by as much as 1.4% in 2024, which could have been even bigger were it not for a favourable base in the auto industry. We remind that there were production interruptions with some automotive producers in the summer of 2023, which led to a stronger year-on-year performance in Q3 2024.

Data Download

This time, the manufacturing decline remained flat, at 3.1% y/y in December, which we suspect is the consequence of a one-off factors, like invoicing at the end of the year, which has impacted production numbers. It is why repair of machinery & equipment had a strong upward impact in December, switching from a 1.4% y/y fall in November to a 17.9% y/y jump in December. On average, repair of machinery & equipment remained flat throughout 2024, which is why we would argue that manufacturing performance in December is misleading. If that effect were excluded, then manufacturing output would take a much sharper dive towards the end of the year, as the traditionally strong sectors performed poorly. For example, production of motor vehicles fell by 11.3% y/y in December (faster by 4.2pps m/m), electrical equipment output was down 12.3% y/y (faster by 8pps m/m), and production of other transport equipment decreased by 27% y/y (faster by 10.7pps m/m). The only major sector that reported a sizeable recovery was rubber & plastics, where output eased its decline from 7.2% y/y in November to 2.5% y/y in December.

New industrial orders did not fare well, either, as they fell by 0.6% y/y in December, faster by 0.4pps m/m. In all fairness, export orders recovered a bit, turning from a 3.6% y/y decline in November to a 0.5% y/y increase in December. This has been reflected in recent PMI surveys, but the improvement remains modest at best. Meanwhile, domestic orders fell by 2.5% y/y in December, which is indicative of where things are actually going. Still, net export sales were flat in Q4 2024, which is more in line with the current outlook. Industrial sales did poorly as well, falling by 1.3% y/y in December, almost equally between domestic and export ones.

Weak demand and contracting output have continued to drive employment downwards, falling by 2% y/y in December, which has been the average employment decline in 2024 as well. Meanwhile, nominal wages rose by 7.2% y/y in December, which brings them to a 6.2% y/y increase in Q4 2024. This is in line with the latest CNB forecast, which projects a 6.4% y/y increase in nominal wages in market sectors. Thus, wage growth has been largely in line with what is anticipated in the economy, but not much above it. This is a departure from the typical labour market developments, where industrial wages have been typically rising faster than the average.

All in all, the December print continues to reflect weak manufacturing demand in Europe. We doubt things will change soon, especially considering the imminent US trade tariffs. While Donald Trump has been his unpredictable self, we expect that tariffs will be levied on EU exports, sooner rather than later. Germany appears not well-prepared to handle such a scenario, and this will ultimately hit Czech manufacturers as well, who are heavily exposed to Germany (getting almost 30% of exports), even if not so much to the US (slightly less than 3% of exports).

• Markets expected CPI inflation at 2.6% y/y
• Energy prices were behind the slowdown, reflecting a favourable base effect
• Service prices eased a bit, and rose by only 1% m/m in January
• We estimate core inflation has eased slightly in January, to about 2.2% y/y
• The flash CPI print keeps the door open for a 25bp cut later on Feb 6
• However, another pause in the monetary easing cycle in March remains very much on the table

CPI inflation eased to 2.8% y/y in January from 3.0% y/y in December, according to the first flash CPI release from the statistical office. The print was a bit stronger than anticipated, as markets projected CPI inflation easing to 2.6% y/y. The same goes for month-on-month changes, where consumer prices rose by 1.3% m/m, while markets anticipated a 1.1% m/m increase. Both readings are within the forecast range, however, though towards its upper end. Before we continue, the flash CPI release uses constant weights based on 2022, but according to the statistical office's presentation last month (slide 12, in Czech only), the deviation has been no more than 0.1pps from final numbers during their test run in 2024.

Unsurprisingly, the slowdown appears to be mainly driven by energy prices, which include fuels in the flash release format. However, fuel prices were not the main factor here, but rather a favourable base effect related to energy prices for households, which was largely anticipated by the CNB. Thus, energy prices turned from a 2.4% y/y increase in December to a 2.4% y/y fall in January, providing an impact of -0.6pps. On a slight favourable note, service prices eased their growth slightly, from 5.0% y/y in December to 4.7% y/y in January, with an impact of -0.1pps. Yet, given that energy prices for households are considered part of regulated services, it means that when eliminating energy, service prices actually picked up growth. On the other hand, goods' prices reported a flat increase at 1.7% y/y, given that they rose by 1.5% m/m, which was typical for the beginning of the year.

Regarding the analytical breakdown, the statistical office doesn't quite offer the same measure for core inflation as the CNB does, but the closest appears to be CPI excluding energy, foods, alcohol, and tobacco. The main difference with the CNB measure is that it excludes fuel prices as well, which implies a slight slowdown. Given that fuel prices picked up growth slightly in January, the odds are that the CNB's core inflation measure ended up at around 2.2% y/y in January, slower by 0.1pps.

Monetary policy impact

We would argue that the flash CPI print will be broadly in line with the expectations of the CNB board, though probably not as strong as hoped for. We don't know the CNB's projections yet, as they will be published later on Thursday (Feb 6), after the MPC meeting. However, we expect that the print will be only slightly above the CNB's projections, if at all. We believe this still keeps the door open for a 25bp cut, though we doubt the vote will be unanimous. Regulated energy prices have behaved in line with expectations, which is a good sign, and service prices have reported a slight slowdown.

Under this premise, we believe that a 25bp cut will leave monetary policy in a restrictive state, providing the CNB board with options at future MPC meetings. Our argument is that while there are major upside risks, they have not quite materialised yet, so the board will likely consider a hold decision as too restrictive, especially given the current manufacturing downturn. In our opinion, this still leaves a scenario with another pause in the easing cycle as likely, as by then, there should be a clearer picture about US trade tariffs and potential energy price pressure.

Donald Trump has been his usual unpredictable self in the first days of his second term, which has only brought uncertainty to the outlook. We still believe tariffs on EU exports are imminent, possibly in the scope of the potential tariffs on Canada and Mexico (i.e. 25%). This will likely provide some supply side pressure, but later in the year. Thus, we expect that the board will want to put the policy rate at a slightly lower level than it currently is (4%), to be prepared to keep monetary policy tight, or even tighten it back, if necessary. Given the latest developments, we see the odds for a single 25bp cut in 2025 as non-negligible, and more than two 25bp cuts as highly unlikely. Thus, we revise our expectations for the policy rate to end up between 3.50% and 3.75% in 2025. We don't rule out rate hikes later in 2025 if price pressure strengthens considerably.

ANO movement is already assembling a government (Hospodarske Noviny)

Kyiv in the mill between Putin and Trump. Will Zelenskyy seek US support in exchange for rare minerals? (Lidove Noviny)

Stanjura against the Green Deal (Hospodarske Noviny)

Czech Republic rejects EU proposal that will make boilers pricier (Pravo)

Investors from Taiwan and Turkish car industry are heading our way (Lidove Noviny)

Big foreign funds express interest in Shoptet. Tomek is not preparing to sell for now (E15)

Another year reporting a loss. Insurance companies to lose billions on case (Pravo)

Hundreds of millions of euro for Czech firms. They could get involved in developing drones, radars, or space technologies (E15)

[Conversation with a bullied schoolgirl:] I was afraid of going outside. I wanted to die (Mlada Fronta Dnes)

Slovak cherries in January? Stupidity, declassify place of origin, a petition demands (Mlada Fronta Dnes)

• Skoda sales were behind the fall, declining by 18.1% y/y
• Petrol car sales did the worst, down by 6.8% y/y
• Sales of electric cars jumped by 107.4% y/y, while plug-in hybrids - by 47.7% y/y, both mitigating the headline decline
• Weak car sales are indicative of consumers still being wary of large purchases

New passenger car sales fell by 5% y/y in January, down to 19,347 units, according to figures from the SDA, the car importers' association. It was not a great start to the year, and Skoda Auto, the largest local producer, was largely responsible, as it reported an 18.1% y/y drop in sales. This is not good news for the company, as it has been seeing a decline in domestic demand. Still, Skoda sales have been doing very well outside the Czech Republic in 2024, so we expect this to be the case in 2025 as well, given the lower price point.

Data Download

By fuel type, both petrol and diesel car sales declined, by 6.8% y/y and 11.9% y/y, respectively. The headline decline was primarily due to petrol cars, which continue to dominate on the market, with a market share of 67%. The sales decline was mitigated by electric cars and plug-in hybrids, which reported an increase of 107.4% y/y and 47.7% y/y, respectively. The strong growth rate was mostly due to the low market share of electric vehicles, as EVs and plug-in hybrids were only 8.4% of total sales, though almost double from 4.5% a year ago. We should also note that the EV segment was not the reason for Skoda's poor performance, as its sales in that segment almost tripled in year-on-year terms.

Used passenger car sales fell by 4.6% y/y in January, down to 10,873 units. The segment is increasingly shrinking, indicating that buyers remain wary about large purchases.

Total vehicle sales, including buses, motorcycles, trucks, trailers, reported a 6.1% y/y decline in January, with new vehicle sales falling by 7.8% y/y. While passenger car sales were driving the fall, the decline rate was stronger in other segments, in line with weak business activity, especially in manufacturing.

• ANO maintains a 16pp lead over Spolu
• STAN is firmly in third place, 4 parties poll between 5% and 6%
• ANO is still in the best position to establish absolute majority in the next parliament

ANO, the leading opposition party, maintained a steady lead in January, according to the latest opinion poll of Ipsos, carried out on Jan 24-29. As you can see from the table, this pollster has not been very active lately, though we can expect more frequent activity this year, which is usually what local pollsters do. Still, you should take comparisons as tentative, as many things changed over the past year or so. ANO polled at 36.7%, which is a bit on the higher end when compared to recent polling, but not outside the plausible. It has a 16pp lead over the ruling Spolu coalition, which is in line with what other pollsters have been reporting. STAN, the other ruling party, comes up third at 12%, and has a maximum electoral potential similar to the one of Spolu. Yet, we imagine that Spolu and STAN voters are likely coming from the same pool, as a gain for one formation will likely mean a loss for the other.

Interestingly, the pollster puts the next 4 parties all in the 5-6% range, which means none of them is absolutely guaranteed to pass the 5% electoral threshold. These are currently the SPD, the KSCM, the Motorists, and the Pirates, who left the government last September. The Pirates appear to be the most threatened, which again is plausible, though the party has not been really campaigning for the general election yet. Regarding the rest, we see the performance of the SPD on the low side, but it may be losing voters to the Motorists, a relatively new party, which appears to be attracting the anti-establishment vote, at least for now. No other party is likely to make it to parliament, as all others are polling under 2%.

This still puts ANO in the best position to establish an absolute majority in the next parliament. Even assuming that all parties in the original makeup of the current ruling coalition partner up again, they will not be able to get more than 80-85 seats, out of 200. Meanwhile, ANO will have plenty of options to pick from, as the SPD, the Motorists, and the KSCM will gladly ally with them. The points of friction we potentially see are related to the SPD, which ANO would rather have outside the next government. The SPD is a strongly nationalist party, and it has been associating with Germany's AfD in the European Parliament. Yet, it appears that with a result like that, the SPD is unlikely to be in a kingmaker position more than the KSCM and the Motorists would. The SPD is supposedly mellowing its policy goals (the party wants the Czech Republic to leave the EU and NATO), but we doubt that voters will accept ANO going that far.

It is no coincidence that the Ukrainians have now begun their campaign to discredit Viktor Orbán. (Magyar Nemzet)

Viktor Orbán is attacked by the left for supporting pensioners [Bloomberg accuses the Hungarian PM of political tactics while the PM is defending the interests of the Hungarian people, says state media] (Magyar Nemzet)

There's a lot of money involved in the construction industry, yet many people still work illegally (Vilaggazdasag)

Forint is ruthlessly taking advantage of weakening dollar, euro hasn't been this cheap for a long time (Vilaggazdasag)

Orbán on USAID's involvement: I think the world owes Trump a debt of gratitude (Heti Vilaggazdasag)

Two nerfs, NER style: a Russian-Hungarian oligarch's interests can build almost anything on the lake shore (Heti Vilaggazdasag)

The steamroller stopped a year ago: today Fidesz mostly runs after Péter Magyar (Heti Vilaggazdasag)

• Petrol price had been expected to be flat as HUF strengthens

The cost of petrol and diesel will increase slightly from Feb 6, the specialist website holtankoljak.hu reported Wed. The petrol price will rise by HUF 2.0 to HUF 631 per litre while the diesel price will rise by HUF 3 to HUF 639. The website had reported a few days ago that wholesale prices would not rise as the HUF has strengthened to the USD of late.

Overall, fuel prices have been pressuring inflation up of late, and fuel prices rose to 8.3% y/y in December on the back of a 2.2% m/m increase. That reflected some rises in global prices combined with a weak HUF. Global oil prices have come down of late, but the future path is likely to be uncertain as the Trump impact is to increase global uncertainty sharply. The HUF has strengthened to the USD a lot of late, but one would imagine uncertainty will be the watchword here too. The automatic excise tax indexation will likely boost the fuel impact on inflation in January, but there is scope for less pressure if the HUF remains strong and global oil price moves are benign.

• EP's legal committee has to finalise move, which will help EC in case before CJEU
• This could make eventual fines against Hungary more likely

The European Parliament (EP) is set to join a case at the Court of Justice of the EU (CJEU) against Hungary submitted by the European Commission (EC) over the sovereignty protection law, helping create EU unity and possibly increasing the chance of eventual fines, according to a report in the left-leaning Népszava. The EP's full legal committee must still okay the move, but considering the balance of power on the committee this is expected to happen soon. After that EP head Roberta Metsola must give her approval.

The EP's help, assuming it does come, will strengthen the EC's case and provide more legal assistance in the case against the December 2023 law that created an office to investigate foreign subsidies that might influence Hungarian elections. The EC launched an infringement procedure against the law for violating the protection of privacy, the freedom of expression and association, and the rules of the internal market. The Hungarian government has failed to address the matter acceptably and the EC submitted a case to the CJEU.

Member states can also join the lawsuit by the end of February. Népszava noted that Denmark and the Czech Republic have indicated they support the commission's case.

Overall, infringement cases generally give a country many chances to comply before going to the CJEU. The CJEU's ruling will come, and then on that basis, the EC can move to ask the CJEU to impose a fine on the country in question. In this case, it looks very likely this will happen, which might give the opposition more ammunition in its bid to dislodge Fidesz, though could also help the latter's narrative that it is the EU that treats Hungary unfairly.

• Expanded renovation program clearly marks stepping up of pre-election spending

PM Viktor Orban confirmed Wed. that the government will expand a rural home renovation program to pensioners in what marks a de facto return to pre-election spending. Orban said Tues. in a social media post that the expanded eligibility would see some HUF 90bn spent over two years. The decision will widen eligibility for an existing program from those with children under 25 to pensioners in communities with less than 5,000 people. Orban said Tues. that if the program went well, it could be expanded further after two years. The program was first run in 2021-22 and then re-launched in early 2025.

Overall, the pre-election spending comes as Orban's Fidesz is facing what looks like a real political challenge from the Tisza Party. The latter party took 42% in a recent poll from the left-leaning Publicus pollster vs. 37% for Fidesz. There is just over a year to go before the parliamentary election to be held in Q2 2026 and one would expect the government to go all-out to ensure victory. State media is already full of stories attacking Tisza Party leader Peter Magyar. Those efforts will continue, as will the pre-election spending.

Interest rates unchanged [daily notes many are waiting for lower rates, but they will need to be patient; articles cites futures market pricing in 75bps of cuts and first move not till autumn] (Gazeta Wyborcza)

New balance of power is being formed in the govt [June reshuffle to slim down govt; super economics ministry to be formed from Industry and Development Ministries; Health Ministry Leszczyna to depart; Science and Education Ministries to be merged; talk now about reshuffle is designed to take focus off of govt activities and help Trzaskowski in campaign] (Rzeczpospolita)

Tusk mobilises MPs [PM encourages KO MPs to be present on social media] (Gazeta Wyborcza)

Defense Minister Kosiniak-Kamysz: Investing in US weapons is insurance policy [PL also hopes fact PL will spend nearly 5% of GDP on defense, most in NATO, will help with Trump] (Gazeta Wyborcza)

IPN: That is, Institute to Promote Nawrocki [PiS presidential candidate Nawrocki is head of Institute for National remembrance, or the IPN] (Gazeta Wyborcza)

Commissioner for Human Rights asks candidate Nawrocki about scientific freedom at IPN (Rzeczpospolita)

Freedom of research occurs only at the declarative level, in statements by the IPN authorities to the media - an IPN employee tells "Rzeczpospolita". The Commissioner for Human Rights is renewing the inspection.

More expensive goods from China [front-page story on likely coming EU attempt to combat Temu and Shein] (Rzeczpospolita)

Long list of business recommendations for EU during Poland's presidency (Rzeczpospolita)

Highest train passenger travel in nearly 30 years [some 408mn trips completed in 2024, though Poland's rail network remains underdeveloped compared with EU peers] (Rzeczpospolita)

Trump: Displace Gazans [front-page story about US president's comments US will take Gaza and develop property there] (Rzeczpospolita)

America to take Gaza [front-page] (Gazeta Wyborcza)

Housing sales take ever longer (Rzeczpospolita)

Even the sky is not the limit [Tusk takes part in event ahead of spring mission to ISS by Polish astronaut (Gazeta Wyborcza)

• Inflows rise to EUR 983mn in Dec from EUR 347mn in Nov
• Payments to EU rise to EUR 935mn in Dec from EUR 610mn month before
• FinMin also says RRF inflows rise to EUR 7.3bn in Dec

Poland was a net EUR 48mn payer with the EU in terms of fund flows in December, according to data released Wed. by the Finance Ministry. This compares with a net EUR 263mn payer position the month before and a net EUR 519mn beneficiary position the year before.

Data Download

Total inflows rose to EUR 983mn in December from EUR 347mn in November, though was below the EUR 1.0bn seen the year before. The Finance Ministry stopped breaking down the total into current and capital transfers from April 2023. Instead, it publishes data on how much of the inflows were Cohesion Funds (EUR 733mn) and CAP funds (EUR 253mn).

In Jan-Dec, some EUR 10.1bn of EU funds were sent to Poland, which is well down from EUR 13.5bn a year earlier. To note, this total does not include Recovery and Resilience Facility (RRF) funds. The FinMin said in a note the RRF inflow total rose to EUR 7.3bn in December from EUR 3.2bn in Jan-Nov (with the FinMin only including grant totals and not the RRF loan value). This came as the EU transferred EUR 9.4bn in EU funds to Poland in December.

Contributions to the EU budget rose to EUR 935mn in December from EUR 610mn in November. The contribution total for 2024 was EUR 7.6bn, up from EUR 6.5bn in 2023.

Overall, 2024 was a transition year between the 2014-20 and 2021-27 EU budgets and that accounted for the slowdown in regular EU funds. However, the RRF funds more than softened the blow. If the EUR EUR 7.3bn in EU grants is booked, the inflow total is rather some EUR 17.4bn, which is up by around EUR 4bn y/y. The year 2025 has already seen the government motion for EUR 7.3bn in RRF funds and more applications are to be made in the year. Usage of regular EU funds should step up as well, and all of this investment will help boost economic activity.

• MPC's post-sitting justification of hold was nearly precisely same as in Jan
• MPC to continue to be on hold till energy outlook clear, and that isn't likely till July meeting at earliest

The Monetary Policy Council held interest rates on Wed., as all expected, and its justification for this hold was nearly the precisely the same as in January, according to the post-sitting statement. In fact, the six key bottom paragraphs of the statement were unchanged from January, and that includes the inflation paragraph. That was possible because there was no fresh inflation data for the sitting since the stats office GUS stops publishing flash inflation releases until after the release of the updated basket in mid-March. That means the MPC only had December CPI inflation, which it already had for its January sitting.

The MPC's hold is thus based on the fact it says inflation will remain markedly above the NBP inflation target in the coming quarters, driven by the effects of the already introduced increases in energy prices as well as rises in excise duties and administered services prices. It added, again, that core inflation will also probably continue to be elevated. Finally, it continued to say that the unfreezing of energy prices in H2 2025 "may" contribute to extending the period of inflation staying above the target.

Still, the MPC did also continue to say that inflation in the medium term should return to the target assuming wage growth slowed. Uncertainty factors were inflation expectations, wage pressure, and further fiscal and regulatory policy measures.

Overall, we do continue to believe the MPC could be in position to cut rates at its July sitting, though would depend on the government and regulatory energy decisions meaning inflation won't rise in Q4. If those decisions, which should be out by mid-June or so, come in line with that expectation and inflation peaks in Q2, then the updated July inflation projection should open the door to the July cut. But we are beginning to see a chance that the timing will slip to September (there's no meeting in Aug). The MPC won't have July inflation in its July sitting and so it won't see how the new power and natural gas tariffs will impact headline inflation. Moreover, the fiscal question is a big one and it probably won't be that clear what the budget will actually look like for 2026, a year the government wants to begin cutting the general government deficit in earnest. But for the Sep 2-3 sitting, the budget should have been approved and thus the fiscal outlook should be clearer, and it should be clearer that fiscal policy will be tightened, thereby giving more room for monetary easing. Much will of course depend on the data, but it does still seem likely a cut will come in either July or September.

• Next MPC meeting: Mar 11-12, 2025
• Current policy rate: 5.75%
• EmergingMarketWatch forecast: 5.75%

Rationale: The Monetary Policy Council held rates at its Feb 5 policy sitting, as widely expected, and it is likely to hold rates in the months ahead as well, as rate cuts are only likely to appear once the considerable current uncertainty is cleared up. NBP and MPC chair Adam Glapinski has said that the council will not cut rates if inflation is rising or if forecasts don't show the very high likelihood of inflation being at the target in the medium term. The latter condition is probably met since the November inflation projection did show inflation falling to the target in the medium term, but headline inflation has risen and is likely to push higher as well in the coming months. Until that latter reality changes, Glapinski won't back a cut, and it does remain likely that a cut will only occur if Glapinski supports it.

The MPC will receive a new Inflation Report for the March sitting, and that should help clarify the outlook, though only to some degree. The problem is that the government's existing power price plan is that the anti-inflation freeze might expire in Q4 2025. If it did, then inflation would rise and Glapinski's first condition would not be met. However, the government's plan also says that the tariff on power is to be changed in Q2. Finance Minister Andrzej Domanski has made it clear the government is ready to freeze prices against in Q4 if needed (and the cost of this freeze has fallen a lot). We continue to believe that either the tariff will be cut enough that the Q4 inflation rise, if it occurs, will be very small or the government will continue with some sort of cap (one can't rule out it will be shifted higher in order to further close the gap with the tariff). Whatever inflation rise set for Q4 would likely be small.

The energy regulator won't make its power tariff decision likely before mid-June. That means the uncertainty about Q4 inflation will run through the coming months and to the July sitting, precluding an interest rate cut (unless inflation crashed for some surprise reason). The regulator will decide in mid-June on natural gas tariffs as well. Natural gas prices in Europe have risen of late and the chance does exist of higher tariffs. One must recall, though, that the anti-inflation measures for power, gas, and heating were partially lifted in July 2024 and so that high base will mean July inflation falls. The question is the extent, with the higher the tariffs, the less the disinflation.

The uncertainty over July inflation does mean that our view the MPC might be in place to cut in July is losing conviction. If the Glapinski condition that inflation must have peaked and be falling is actual, then the MPC can't very well cut if it only has June inflation. Because the MPC takes a holiday break in August, this means that if the MPC does want to have July inflation, it won't cut until the September meeting. This variant would also benefit from the fact the new president will take over in early August and thus that uncertainty will be cleared up too. And, as the loose fiscal policy has been a big problem for all MPC members, the government's 2026 budget -- and the main fiscal consolidation plans -- will also be known in September (but not in July).

If inflation comes down more than expected, and nothing in the outlook threatens it, the MPC will be in place to cut in July, assuming the inflation projection to be updated in that month leaves the way clear for a cut. But it is starting to look increasingly likely the cut could shift to September, leaving four meetings to have potential quarter-point cuts and put the total easing at 50-100bps this year.

Archived video of all MPC press conferences

MPC's post-sitting statements

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• Post-sitting statement to be published at 16:00 CET
• Glapinski to hold his presser on Thurs. at 15:00 CET
• MPC likely to remain on hold in coming months with cut timing unclear

Poland's Monetary Policy Council decided Weds. to hold its benchmark interest rate at 5.75%, matching the consensus in the fifteenth straight hold, according to a statement. The MPC will publish its post-sitting statement at 16:00 CET. NBP and MPC head Adam Glapinski will give his monthly press conference on Thurs. at 15:00 CET to further explain the decision. The decision came out quickly.

Data Download

Overall, the decision was likely made as the calendar helped lead to a relative paucity of data. Usually, the MPC meeting will have at least the flash inflation estimate for the previous month, but because of how Statistics Poland (GUS) updates its inflation basket early every year, there is no flash estimate for January. That means the MPC has only December inflation still, and that is increasingly out of date, especially since the so-called January effect price rises just aren't known. But the MPC is also relatively strongly united that rates can't be changed as long as inflation is somewhat high and expected to rise further. There is also far-reaching uncertainty, whether from the new policies of Donald Trump or from the ultimate government and regulator decisions on energy prices. We continue to believe there is a good chance of a cut in July (by when the energy decisions will be known, inflation should have peaked, the Trump impact should be known, and the May-June presidential election will be over), but it can't be ruled out the timing will push to September [there's no Aug meeting], especially if the council wants to actually see July inflation (which will be down due to a big base effect, though the extent of that is unclear at present).

• FinMin is offering 5- and 10-year benchmark bonds

Poland's Finance Ministry said Wed. that it tapped BNP Paribas, Deutsche Bank, Goldman Sachs Bank Europe SE, and Santander as bookrunners for a 5-year and 10-year benchmark bond denominated in USD, according to a statement. The transaction is subject to market conditions, it said.

Overall, the Finance Ministry is stepping up foreign issuance this year to help cover record budget financing needs of PLN 553.0bn. To this end, it issued EUR 3bn in EUR-denominated bonds on Jan 9. It is now offering the USD bonds. The previous issue occurred on Mar 11, 2024, when it sold a record USD 8.0bn worth of three series of bonds. It sold USD 1.5bn of a 5-year bond maturing on Mar 18, 2029 (priced at 70bps over comparable US bonds), USD 3.0bn of a 10-year bond maturing Sep 18, 2034 (priced 105bps over comparable US bonds), and USD 3.5bn of a 30-year bond maturing on Mar 18, 2054 (priced at 130bps over comparable US bonds).

• Registration growth rate brakes from 29.7% in Dec as buyers were trying to front-run Jan regulation change
• But Samar notes this was best January since record-breaking 2019
• Registrations fall 21.6% m/m to 49,171 units from 62,746 units in Dec
• For 2025, Samar forecasts 1.5% rise to 627,500 units

Polish passenger car and light commercial vehicle (LCV) registration growth slowed sharply to 3.7% y/y in January from 29.7% in December, according to data published Wed. by the car-market monitoring company Samar. Car registrations had been lifted in late 2024 by buyers attempting to purchase ahead of the introduction of new CAFÉ regulations on CO2 emissions from Jan 1. The total fell 21.6% m/m to 49,171 units in the month from 62,746 units in December.

Data Download

Samar commented that the increase, though down, did mark the 21st straight rise in y/y car registrations and was the best January since the record-breaking 2019. It noted that January is traditionally a weak month for vehicle registrations due to lower activity of institutional clients at the beginning of the year. It added that the new year was dynamically started by car manufacturers from China, who saw a 12% y/y rise in more passenger car registrations in January.

In the January breakdown, passenger car registrations rose 3.4% y/y to 44,248 units, which marked a 20.6% m/m decrease.

LCV registrations fell 30.2% y/y to 4,923 units in January, though the total rose 6.2% m/m.

For 2025, Samar forecast that passenger car registrations would rise to 560,000 and LCV ones to 67,500, for a total of 627,500, giving growth of 1.5%.

Overall, registration growth of nearly 15% marked a very strong 2024 and so 2025 will face a high base. But the year has started out relatively well despite the slowdown in the pace of growth. GDP growth is to quicken in 2025 and, as fleet customers account for most of the registrations, one could see scope for a bigger registration rise than the 1.5% forecast by Samar. Still, much will depend on how global trade is actually impacted by the Trump administration and perhaps by how the situation in Ukraine develops.

Question:

I think Cumhuriyet had a story a while back about Simsek possibly being moved in a Cabinet reshuffle. Have you seen any other stories to indicate that this might be a possibility, and do you have any view on whether this is likely or unlikely? .

The question was asked in relation to the following story: Simsek focuses on reforms, fiscal discipline, and supply-side measures for 2025

Answer:

Cumhuriyet is a pro-opposition platform, so such reports occasionally surface. Indeed, there were speculations in late August regarding Simsek's position, but these were officially refuted by the Presidency's directorate of communications' centre for combating disinformation, which deemed the claims baseless and designed to provoke market instability.

The ruling AK Party is reportedly preparing for significant changes in the cabinet, with these shifts expected to follow the party congress in late Feb 2025, as previously noted in our story. Initially, only a few ministers were expected to be affected; however, based on recent rhetoric, the minister of tourism is now almost certain to be replaced due to the Bolu Kartalkaya fire disaster, which resulted in the deaths of 77 people. Media reports also indicate that the ministers of the interior, justice, labour, family, energy, and agriculture could also be replaced.

Recent reports from reputable media outlets do not suggest that Simsek will be removed. On the contrary, President Erdogan has expressed support for the current economic program-and, by extension, for Simsek himself. In this context, we believe that removing Simsek would jeopardise Turkey's delicate economic equilibrium. Based on our assessment, President Erdogan is more inclined to retain him unless political considerations begin to outweigh the benefits of maintaining stability. Consequently, for the time being, we consider Simsek's position to be secure.

• Investors oversubscribe nearly three times, signalling strong global appetite
• Bond yields at 7.2%, reflecting favourable pricing and strong demand

The Treasury completed its first external borrowing of the year by issuing a 7-year bond worth USD 2.5bn, the finance ministry announced. The transaction took place within the 2025 external financing program, marking a significant step in securing funds from international capital markets, it indicated. The proceeds were scheduled to be credited on Feb 12, aligning with the set timelines for this debt sale, according to the finance ministry.

The bond carried a coupon rate of 7.125% and a yield rate of 7.2%. This resulted in a spread of 287.9bps over comparable US Treasury bond yields, which represented the lowest premium among similar conventional bond issuances in the past seven years, the Treasury noted. Over 200 investors showed interest in the bond, generating demand nearly triple the offered amount. The distribution of the bond sales indicated robust international participation, with 40% allocated to investors in the UK, 34% in the US, 12% in other European countries, 8% in Turkey, and 6% in other regions. The mandate to lead the transaction had been granted to Citi, Goldman Sachs, JP Morgan, and Societe Generale.

This bond sale marked the first external borrowing under the 2025 international financing program. Although the Treasury has yet to outline its exact external borrowing strategy for 2025, it anticipates issuing a total of USD 11bn in foreign bonds throughout the year.

Indictment against IMM mayor Ekrem Imamoglu requesting up to 7 years and 4 months in prison (Hurriyet)

President Erdogan: We make decisions that will shape our future with Syria (Hurriyet)

Provincial special administration secretary general and his assistant are detained in investigation of hotel fire disaster in Kartalkaya (Hurriyet)

CHP leader Ozel condemns indictment prepared for IMM mayor Imamoglu (Sozcu)

Indictment is prepared against Edirne CHP's former MP Ediz Un (Sozcu)

CHP leader Ozel proposes to establish earthquake ministry to government (Sozcu)

Trade minister Bolat: We start new year strong in textile and apparel exports (Sabah)

Parliament speaker Kurtulmus: US President's words about Gaza are never acceptable (Sabah)

Operation in 21 provinces against ISIS: 164 terrorists are captured (Sabah)

Transport minister Uralolu: Air traffic increases by 13% y/y in January (Sabah)

• IMM mayor Imamoglu faces a potential 7 years and 4 months prison term and political ban for alleged insults and threats
• Legal proceedings include allegations of targeting counterterrorism officials
• Imamoglu is currently involved in two other legal proceedings and one additional investigation

Istanbul Chief Public Prosecutor's Office terror offences investigation bureau prepared an indictment against IMM mayor Ekrem Imamoglu, seeking a prison sentence ranging from 2 years and 8 months to 7 years and 4 months, the local media reported. This case focused on allegations of targeting individuals involved in counterterrorism, as well as claims of insult and threat. The legal process additionally included a request for a political ban, and the Istanbul Chief Public Prosecutor's Office identified the Istanbul Chief Public Prosecutor as an aggrieved party.

One of the CHP's prospective presidential contenders, Imamoglu, is currently involved in two legal proceedings. The first arose after the 2019 local elections, alleging his use of discourteous language a.k.a. "idiots" toward YSK officials. Although the court initially imposed a prison sentence of two years, seven months, and 15 days, coupled with a political prohibition, this verdict remained under appeal. The undetermined timeline for a ruling from the regional court underscored repeated appeals by his legal team seeking an expedited conclusion. The second case revolved around accusations of bid-rigging during Imamoglu's tenure as Beylikduzu mayor, exposing him to a potential three- to seven-year prison term and a possible political ban. Conflicting expert assessments led the judge to commission additional reviews before final judgment. Originally scheduled for early October 2023 and then postponed to this January, proceedings were delayed yet again to April. Every incremental development consistently fuelled public discourse on governance standards, legal independence, and implications for the political sphere, illuminating the considerable effect these court decisions may, in our view, have on Turkey's economic and political milieu.

Meanwhile, November 2024 brought another line of inquiry, as the Istanbul Chief Public Prosecutor's Office initiated an investigation into the municipality's expenditures on certain events. Prosecutors, in coordination with Interior Ministry inspectors, focused on disputed spending that was suspected to have inflicted monetary loss upon the public purse-yet another factor heightening the municipal administration's legal challenges.

• Next MPC meeting: Mar 6, 2025
• Current policy rate: 45%
• EmergingMarketWatch forecast: 250bp cut
• Rationale: Annual inflation path trumps monthly volatility, supporting further cuts while real rates stay positive

Based on the latest rhetoric, we expect the CBT to continue its monetary easing at the March meeting, potentially implementing a 250bp cut. In its assessment of monthly price developments, the CBT emphasised the deceleration trend in annual inflation, maintaining cautiously doveish undertones while reflecting a nuanced interpretation of monthly inflationary pressures. Furthermore, it highlighted contained core inflation trends as indicators of moderating structural demand pressures. The Bank characterised recent price dynamics as transitory and attributed monthly price increases to policy-driven calibrations. However, it acknowledged persistent supply side risks - including global energy volatility, producer price disruptions, and backward indexation behaviours - which introduced an element of prudence to its outlook.

Data Download

As the year commenced, Turkey entered a period marked by the revaluation rate, determined in alignment with the preceding year's elevated inflation, leading to upward adjustments across numerous taxes and fees. Concurrently, long-postponed public-sector price adjustments were finally implemented, paving the way for the private sector to introduce their markups at the start of the year - a period that typically proves favourable for such revisions, we assess. A salient departure from the prior two years emerged in 2024, with the minimum wage increase being anchored to expected inflation rather than retroactive figures, we note. This shift, in our view, unfolded against a backdrop where the official 2025 inflation projection was set at 21%, while managed price adjustments-spanning tolls, utilities, and administered sectors-soared to approximately 44%. Although such administered price increases exerted limited direct impact on headline inflation due to their narrow weight in consumption baskets, we think their signalling effect remained potent, as evidenced by January's services inflation surging to 10.3%, double the headline figure of 5%. This, in our assessment, underscored the indirect psychological and behavioural pressures embedded in pricing dynamics.

Looking ahead, we expect February's inflation to sustain its current momentum, with cumulative inflation approaching 8.5-9.0% in January-February. As a result, year-on-year inflation is projected to hover around 40.5-41.1% in February, a level that the CBT may appear to view as compatible with further monetary easing. In its January rate-setting meeting, the Bank explicitly prioritised the decline in annual inflation trajectory, signalling, in our assessment, a willingness to proceed with rate cuts as long as extreme monthly deviations do not occur. Assuming that a 250bp cut will leave the policy rate at 42.5% - comfortably above our above-mentioned inflation projection of 40.5-41.1% - we believe that if February's data aligns with our forecasts, the CBT is likely to resume its easing cycle in March. Crucially, even with such cuts, real interest rates would remain positive, providing a critical buffer in light of entrenched inflation expectations. However, a material downside surprise in February's data - such as inflation significantly overshooting forecasts - could prompt a pause, although we consider this a secondary scenario.

Beneath this outlook lies a profound structural tension, in our view. If cumulative inflation reaches 9% in January-February, achieving the CBT's year-end target of 21% would necessitate inflation averaging a mere 1% m/m across the remaining ten months. Even to remain within the upper bound of its forecast, 26%, inflation would need to stabilize at 1.4% m/m. Both thresholds border on implausibility, by all accounts, appear exceedingly difficult to achieve. This dissonance between official targets and on-the-ground price dynamics raises existential questions about the credibility of the disinflation framework.

Summary of January rate-setting meeting

MPC rate decision in January

Quarterly Inflation Report for Q4

Monetary policy strategy for 2025

Caputo said the IMF deal doesn't imply a devaluation nor an immediate exit from FX controls (La Nación)

Luis Caputo said the IMF deal doesn't entail a devaluation (Clarin)

The Economy Ministry meets with agriculture leaders to give them financial advice [allegedly to convince them to sell for-export stocks and take advantage of interest rates that are higher than the crawling peg rate] (Clarin)

Poverty declined in the second half of 2024 due to disinflation and the strong raise of the universal childcare allowance (Clarin)

The government would keep power and gas subsidies unchanged until the midterm elections (Clarin)

After anchoring the exchange rate, the government wants wages rising at 1% to force inflation down (Clarin)

After the WHO exit, Javier Milei ponders withdrawing Argentina from the Paris Accord (Clarin)

The government announced it will prohibit gender change treatments for minors (Clarin)

Guarantee of USD 325mn executed in England [it was deposited to continue a GDP warrants suit that the country eventually lost] (La Nación)

• Decision taken unilaterally shows Milei's circle wants to escalate the sociocultural battle against progressives
• Milei has reelection assured if he fixes the economy and stays out of trouble, he is choosing to create and grow an opposition

Libertarian President Javier Milei decided to ban gender change treatment and surgeries for minors, according to a statement published Wed. on the X account for the president's office. The argument was that minors don't have the cognitive maturity necessary to take decisions on irreversible processes. The statement also repeated an amended version of a controversial line Milei said at the Davos Forum, which is that gender ideology taking to the extreme and applied on children is equivalent to child abuse.

It is worth noting that the government is trying to make a big deal out of this news. Presidential spokesperson Manuel Adorni even organized an impromptu press conference at 6:00pm to repeat the announcement before all national media.

Overall, we believe this is relevant news because the government is creating its own opposition by pursuing a conservative agenda in a confrontational manner. Regardless of whether one believes gender change treatment for minors should be allowed or not, the government is choosing to use the topic to escalate a sociocultural battle when it decides to pass these changes unilaterally, instead of allowing Congress to work on the matter.

We believe the government choosing this path is negative for the electoral performance of the ruling Freedom Advances (LLA) and Milei's reelection chances. Milei was elected with a mandate to fix the economy, and it is hard to imagine him not getting reelected if he delivered on that front and avoided trouble. If Milei's circle is going to continue to insist on a confrontational approach to push conservative social reform, he will push a lot of people that would have voted for his economic policy to vote against his social policy. This of course assumes that voters who care about this sort of stuff are a lot more progressive than the government, which is an assumption based on the way Argentina's society reacted in the past to discussions about same-sex marriage and abortion.

• Vehicle production rises for now despite growing competition from Brazil
• Sales jump to highest for a January since 2018

Vehicle production increased 32.7% y/y in January to 30,058 units, rising from a low base, according to data published Tues. by the automakers association Adefa. The y/y comparison is eschewed because vehicle production was limited by import controls and extreme nominal volatility. The output number for this January is far from prior highs in the series for the month, but it is a good performance when considering the growing competition local vehicles face from Brazilian cars.

Data Download

Vehicle registrations in January increased 103% y/y to 68,988 units. This was the highest registrations number for a January since 2018, when registrations were a record 120,558 units. January was the third month in a row with vehicles produced abroad explaining more than 50% of registrations.

• Govt says WHO recommendations and work are based on political influence, not scientific evidence
• Govt shows alignment with Trump's foreign policy, needs to be careful about not going against majority sentiment in Argentina too often

President Javier Milei decided to withdraw Argentina from the World Health Organization, according to a statement published on the X account of the President's Office. The argument is that the WHO's recommendations are based on political influence and not scientific evidence, and that the organization limits countries' sovereignty by adopting competencies that it doesn't have. The example cited was the WHO's decision to back the previous government as it imposed long Covid lockdowns that kept kids out of school, caused the bankruptcy of several businesses, and still cost 130,000 lives.

Overall, this is a decision the government takes to show its alignment with the foreign policy approach of the United States when it comes to its drive to reformulate the way supranational organizations work. The government surely hopes this alignment can yield benefits of some kind, perhaps in terms of political support as the government seeks IFI financing. This decision may trigger a negative reaction in Argentina at first, but it should not have a lasting political impact since there are no immediate practical effects from withdrawing. Still, the government should be careful not to take too many of these decisions that probably go against majority sentiment in Argentina.

• Bill supported by LLA and PRO looks to suspend primaries for 2025 midterms

The bill that proposes to suspend the compulsory primaries for national elections in 2025 received a favorable opinion by lower house committees and seems headed for approval this month. The bill would suspend the primaries for the 2025 midterms, which elect half of the seats in the Chamber of Deputies and a third of the seats in the Senate. The proposal was mainly supported by the ruling Freedom Advances (LLA) and Republican Proposal (PRO), but received a handful of necessary votes from most of the big opposition parties, including the Front for Victory (FPV).

LLA is in favor of suspending the primaries because it has a vertical power structure, and President Javier Milei's inner circle wants to ensure that the list of nominees the party submits for the midterms are all people loyal to them. PRO is in favor because ex-President Mauricio Macri wants to affirm his leadership of the party and doesn't want to get challenged by pro-Milei factions.

The situation in the FPV is interesting. The party's leader, ex-President Cristina Kirchner, was initially in favor of the suspension of the primaries, so that she could have the power to select the party's nominees in most districts without getting challenged. However, the main challenger to Kirchner's rule of the Peronist movement is Buenos Aires Governor Axel Kicillof, and he needs the suspension of the primaries to be able to detach the date of the Buenos Aires local elections from the national legislative elections. Kicillof wants the detachment for a stronger incumbency effect, which gets diluted when the local elections are concurrent with national elections. Kirchner doesn't want this detachment because local leaders, who move a considerable number of votes, would not have the same incentives to collaborate with the FPV's national ticket if the local elections are not concurrent.

Overall, the compulsory primaries are a good tool, but a one-time suspension for midterms doesn't seem problematic. One thing worth noting is that primaries taking place in August have generally caused big market swings, since the outcome of the primaries pretty much tells in advance what the outcome of the election will be.

Haddad presents priorities to Congress with regulation of big tech, tax exemptions, and limit on super salaries [same as those set by Haddad earlier this year] (O Globo)

Lula says inflation is 'reasonably under control,' but recognizes the rise in meat prices (Gazeta do Povo)

Haddad: Design of compensation for income tax exemption reform is ready and has Lula's approval (Carta Capital)

Lula says he's in no hurry for ministerial reform and admits waiting for former Senate leader Pacheco's answer (Band)

STF Justice Barroso hits back at criticism of judiciary and says Supreme Federal Court is not an 'activist court' (G1)

Lula says Bolsonaro 'will lose again' if he can run in 2026 elections (Valor Econômico)

MPF's sights set on BRL 450mn in pix amendments [special transfers to states and municipalities] (CNN Brasil)

• Lula says government takes inflation control seriously
• Lula says Brazilian economy is doing well

President Lula da Silva said Wed. that he considers inflation to be partially under control, but also that he is concerned over rising food prices, according to comments made during a radio interview. He stated that he is seeking solutions to mitigate these latter increases. Lula says that the government takes inflation control seriously and he would meet with food producers this week to explore ways to curb food price inflation. He added that the Brazilian economy is performing well.

Overall, rising inflation has hurt Lula's approval rating among his supporters. His approval rating dropped to 47% in January, falling below his disapproval rating (49%) for the first time since he took office, according to a recent Quaest survey. That survey also found that 83% of respondents reported an increase in food prices over the past month, up from 78% in December. This scenario poses a challenge to the government as no immediate measures are likely to have a short-term impact on prices. Lula has stated he would not make any "crazy decisions" regarding food prices, and Finance Minister Fernando Haddad clarified that proposed measures so far have not progressed beyond the evaluation stage. With limited fiscal space to increase expenditures as it aims for a zero deficit in 2025, the government is instead hoping that a record forecast harvest this year and FX appreciation will help ease food prices.

• Services PMI falls below 50-pt neutral mark for first time in 16 months
• Weaker demand and lower new business inflow lead declines

The S&P Global Services Business Activity Index for Brazil fell by 4.0pts m/m to 47.6pts in January from 51.6pts in December, marking the third consecutive fall, according to data released Wed. The decline takes the PMI below the 50-pt neutral mark for the first time in 16 months and to its lowest level since April 2021, when it stood at 42.9pts. Both weaker demand and lower new business inflows contributed to the decline while employment and expectations improved in January.

Data Download

Despite weaker demand, input and output costs rose at their fastest pace in two and a half years, S&P Global said. This increase was largely attributed to BRL depreciation, higher international prices, and overall domestic inflationary pressures. Employment showed a marginal improvement, rising for the third consecutive month, while expectations also improved compared to the previous month, as companies anticipate a demand rebound and better economic conditions, the agency said.

Overall, the Services PMI fell below expansion territory for the first time in over a year, potentially signaling some effects of the BCB's monetary tightening. In its latest minutes, the Copom noted that services inflation remained above the level needed to bring overall inflation back to the 3.0% target, which was among the reasons for a more contractionary monetary policy. As we expect the BCB to continue raising the Selic rate and the government to reduce fiscal stimulus, business expectations may have been supported by a robust labor market. Despite a slight rise in the unemployment rate to 6.2% in the rolling quarter ended in December, up from 6.1% the previous month, the annual rate stood at 6.6% in 2024, the lowest level since 2012. However, analysts polled by the Finance Ministry forecast that this rate will rise to 6.8% by March 2025, which should negatively impact the services sector.

• MPC meeting: Mar 19, 2025
• Current policy rate: 13.25%
• EmergingMarketWatch forecast: 100-bp hike (to 14.25%)

The Monetary Policy Committee (Copom) forecasts that 12-month inflation will remain above the upper limit of the inflation target (4.50%) until June 2025, leading to another breach of the target under the new continuous inflation-targeting regime, according to the January meeting minutes released Tues. At its Jan 28-29 policy meeting, the Copom raised the Selic rate by 100bps to 13.25% in the second consecutive increase of that magnitude. The committee based the move on high short-term inflationary pressure -- such as rising food prices due to climate shocks and higher industrial goods prices driven by currency depreciation -- likely persisting into the medium term, thereby necessitating a more contractionary monetary policy. The Copom kept a hawkish stance in the minutes of the first meeting under new BCB Governor Gabriel Galípolo and reaffirmed its December guidance it will deliver another 100-bp Selic rate hike at the next policy meeting in March, bringing the key rate to 14.25%. However, beyond March, the committee opted to leave the door open for further data analysis.

The Copom noted in its minutes that the country's economic activity remains strong despite the contractionary monetary policy, supported by a robust labor market, expansionary fiscal policies, and increased credit availability. While the economy is projected to gradually slow in 2025, the committee has already observed some signs of moderation, though it expressed caution in making this conclusion. A potential indicator of economic deceleration is the recent decline in industrial production in late 2024 despite the sector recording 3.1% growth in 2024, according to recent data from statistics agency IBGE. The official 2024 GDP figures will be released on Mar 7, which comes ahead of the next Copom meeting.

The Copom once again highlighted in its minutes fiscal uncertainties and their impact on inflation expectations, stressing the need for alignment between fiscal and monetary policies. The de-anchoring of inflation expectations, fueled by fiscal uncertainty, remains a shared concern among all committee members, according to the minutes. Despite President Lula da Silva's assertion that no further spending cuts will take place this year, the expectation is that the government will discuss new cuts starting in April, after the approval of the 2025 budget. The budget draft is currently being adjusted to incorporate measures from the spending package approved at the end of 2024 and is expected to be voted on in early March. Notably, the government is also set to propose an income tax exemption expansion in H1 2025, exempting those earning up to BRL 5,000 per month, with compensation via a minimum tax on individuals earning over BRL 50,000 per month. However, significant doubts remain regarding the fiscal credibility of this proposal and whether the minimum tax on high earners will fully offset revenue losses.

Overall, inflation is expected to remain above the 4.50% threshold until June, which should require Galípolo to send another letter to Finance Minister Fernando Haddad explaining the breach and detailing the central bank's corrective measures. For 2025, the Copom forecasts inflation at 5.20%, up from 4.83% in 2024. Given this inflationary pressure, the committee maintained a firm stance on inflation control despite the new Lula-appointed majority. Consequently, a 100-bp hike at the March 19 meeting is widely expected to be approved unanimously. Beyond March, however, uncertainty remains over whether the Copom will maintain its guidance or adopt a more data-dependent approach. While abandoning forward guidance could increase market uncertainty, it may be necessary depending on internal and external conditions in March. Concerns have also emerged over a potential pause in monetary tightening at the May 7 meeting, though we believe it is too early to assume this scenario. In our view, the Copom is more likely to continue raising the Selic rate in May, albeit at a slower pace than the current 100-bp increments.

• Industrial output growth pace slows from 1.7% y/y in November, but exceeds 1.1% consensus expectation
• Output falls by 0.3% m/m in December, marking the third consecutive drop
• In 2024, industrial output rose by 3.1% vs. 0.1% the year before
• Some 17 of 25 activities grew y/y in December

Industrial production in Brazil grew by 1.6% y/y in December, the pace slowing slightly from 1.7% the month before, but exceeding the consensus expectation for a 1.1% rise, according to data released Wed. by the stats office IBGE. The print marked the second consecutive slowdown but also the seventh straight y/y increase. The IBGE noted that there was one extra working day in December compared to a year earlier, helping out. Mining output fell a relatively sharp 7.0% y/y in December in the fourth consecutive decline. By contrast, manufacturing output rose by 3.5% y/y, up from 2.8% the month before. In 2024, industrial output rose by 3.1%, well up from a 0.1% increase in 2023, with the the automotive and IT equipment sectors leading the way.

Data Download

Output rose y/y in 17 out of the 25 activities monitored in December, down from 18 in November and 21 in October. The largest increase came from pharmaceutical products, where output rose by 27.1% y/y, up from 5.1% the month before in the fourth consecutive increase. Next came printing and publishing, rising by 23.4% y/y to mark the second consecutive rise. On the negative side, tobacco output declined the most, falling by 15.8% y/y in the the second consecutive drop. Food and beverages output also fell y/y, marking the second and third consecutive declines, respectively.

In terms of goods, capital goods recorded the largest increase, rising by 13.7% y/y in December, up from 13.2% in November. Durable goods' output rose by 9.8% y/y in December, down from 18.7% the month before. The output of intermediate goods (+1.5%) and non-durable goods (+6.6%) also increased y/y in December.

On a m/m basis, industrial output fell by 0.3% m/m in December, following a revised 0.7% drop the month before to mark the third consecutive monthly decline. Some 15 of 25 activities fell m/m in December. The three consecutive declines effectively erased the 1.0% gain accumulated in August and September 2024, the IBGE noted.

Overall, industrial output growth in 2024 was fairly solid at 3.1% y/y, which was well up from 0.1% the year before. The expansion was driven by robust demand and supported by a strong labor market and credit expansion. However, in m/m terms, industrial output seems to be showing signs of deceleration, which could indicate the beginning of an economic slowdown, as expected by the Copom and stated in its latest minutes. This decline aligns with the drop in the industrial activity indicator from the National Confederation of Industries (CNI), which moved further below the 50-point neutral level in December. The expected slowdown in Q4 2024 is likely to persist into 2025 as the BCB continues tightening monetary policy and the government reduces its fiscal stimulus, thereby providing a double whammy to demand. Brazil's GDP growth pace is expected to slow to 2.5% in 2025 from 3.5% in 2024.

• We understand Cuadra will actively participate on Thursday's monetary policy sitting

The Senate approved on Thursday evening the appointment of José Gabriel Cuadra as the fifth member of Banxico's board, local media reports. The ratification was fully expected, considering Cuadra is well seen and considering the president's strong position in Congress. Indeed, Cuadra was clearly welcomed by the opposition, gaining a unanimous confirmation.

Overall, although we fully expected Cuadra's appointment to Banxico's board to be confirmed swiftly, it surprises us that it came hours before the first monetary policy sitting of the year. We understand Cuadra will actively participate in the sitting, having a quick showing. We find him to be well prepared, with much experience at the CB, suggesting he should have no problem to hit the ground running. However, the decision's timing is notable considering it changes the board's math a bit, ahead of what might be a divided vote. Thus, we'll be surprised if Cuadra votes for anything else than a 50bps cut on Thursday.

• Consensus is strong but not unanimous, 3 of 17 analysts anticipate a 25bps cut
• We agree the dovish board will be cutting its policy rate by 50bps, despite lingering volatility

The CB will cut its Monetary Policy Rate (MPR) by 50bps on Thursday, according to a consensus forecast reached by experts polled by Reuters and published on Wednesday. We agree with this consensus. However, the projection wasn't unanimous, with 3 of 17 analysts polled predicting a 25bps cut.

Overall, the bulk of the CB's board has been clear that they see conditions for faster monetary easing in this sitting. We believe the chances of a 50bps cut are way above 50%. In any case, we believe it will be more interesting to see if the CB anticipates conditions for a second 50bps cut in March, as this would be unsurprising but quite dovish in the current context of reigning uncertainty, in our view.

Sheinbaum diverges from Ebrard, trusts tariff pause will be definitive, asks to avoid speculations (El Financiero)

Sheinbaum trusts on the definite suspension of Trump's tariffs, bets on dialogue with the US (Eje Central)

Juan Ramón de la Fuente spoke with Marco Rubio about migration and security (Milenio)

Sheinbaum says Mexico recognizes the Palestinian State, following Trump's comment on Gaza (El Sol de México)

With a weaker Peso, the remittances will cushion the blow in 2025 (Expansión)

Mexican Peso closes with stability, awaits Banxico's decision (El Economista)

How are Ebrard and Harfuch evaluated in El Financiero's poll? (El Financiero)

Formal employment falls to its lowest January since 2021 (El Sol de México)

Sheinbaum will send reform proposals vs reelection and nepotism (La Jornada)

PEMEX production falls to levels seen in 1978 (Reforma)

Private sector will produce 22% of CFE's 2025-2030 clean energy, PEMEX only 11% (Animal Político)

• Leaves much ground to cover to erase December plunge
• Formal employment may slow in 2025 amid reigning uncertainty and a weaker growth outlook

73 thousand formal jobs were added in January, in a modest rebound that pales vs the 109 thousand jobs added in January 2024, per data published by the Mexican Institute of Social Security (IMSS) on Wednesday. This does little to erase the 405 thousand jobs lost in December, leaving the Nov-Dec moving quarter with 307 thousand positions lost.

Overall, formal employment may hit the breaks in 2025, considering an already poor trend and reigning uncertainty. Indeed, job creation in the formal sector already slowed sharply in 2024, with 214 thousand positions created, vs 651 in 2023. Moreover, the expectation of slower economic growth in 2025 along with the uncertainty brought from the US administration should hinder investment and hiring, to a point, slowing a strong performing labor market.

• Anticipates declining public and private investment
• Says business confidence is poor, economic activity is slowing
• Forecast is surprisingly negative, diverges from consensus projections

GDP will grow by only 0.2% in 2025, local bank Banamex predicted, as quoted on Wednesday by local daily Reforma. This is a surprising projection, in our view, way below the market consensus. The bank explained that it sees investment, public and private, declining in 2025, amid uncertainty and a poor business climate. Moreover, it justified its projection by noting economic growth slowed in late 2024.

Banamex expects a relevant economic rebound in 2026, with GDP up by 1.7%.

Overall, market expectations may probably weaken amid reigning uncertainty, particularly after the turmoil seen over the weekend following the imposition of broad tariffs by the US (eventually delayed until March). We fully agree this uncertainty is weakening the growth outlook, with a particularly negative impact on investment. However, it remains to be seen how much this uncertainty cuts from growth and how much analysts trim or slash their projections as a result.

Click here for our comprehensive database of macro forecasts.

• Capitalized stabilization fund with MXN 45bn
• Vows to diversify its portfolio, delay average maturity
• Measures are welcomed, add to strong FX reserves and an open Flexible Credit Line with the IMF

The Treasury said on Tuesday it's implementing a number of measures to assure the stability of financial markets. Without saying so, these measures are clearly linked to the uncertainty brought about by the US administration and the potential imposition of broad tariffs, which were delayed until early March.

In a statement, the Treasury said the Budgetary Revenues Stabilization Fund (FEIP) now counts with more than MXN 100bn to face any shortfall, in part thanks to a capitalization of MXN 45bn by 2024-end. This is a welcomed development; however, we note it's hardly a position to celebrate, considering the FEIP had MXN 280bn at the beginning of the Andrés López administration and the 2024 capitalization is no measure of the Claudia Sheinbaum administration but the result of a legislative mandate approved in 2022.

The government said another measure is the refinancing of MXN 185bn in bonds, improving the profile of its portfolio, by extending the average maturity. The Treasury vowed to continue delaying the average maturity and to diversify its portfolio.

Finally, the Treasury said its hedging the volatility of the price of oil, the exchange rate and interest rates, to cut financial volatility by a third of a percentage point.

Overall, these measures are welcomed, adding to the strong FX reserves in control of the CB, which closed January at USD 230bn, and to an open Flexible Credit Line open with the International Monetary Fund, which give the local authorities tools to fight an eventual period of sharp volatility. However, we continue to see some weakness on the fiscal side, considering the government bloated the deficit in 2024, needing to move towards fiscal consolidation in the context of rigid welfare expenditures. This limits the government's capacity to promote a countercyclical effort if the economy's deceleration worsen amid reigning uncertainty, in our view.

• Strong improvement surprises us, diverges from slowing growth and weak expectations

Domestic auto sales rose by 5.9% y/y in January, per data published by the stats office INEGI on Wednesday. This comes with 119,811 units sold in the first month of the year, down by 18.1% m/m, on a seasonal effect.

Data Download

Overall, the strong performance of domestic sales to start the year surprises us. This positive print comes despite slowing economic activity in late 2024 and weak mid-term growth expectations. Moreover, the resilience of the consumption of this durable good is notable amid reigning uncertainty. On the other hand, the improvement is consistent with a strong labor market, growing real wages and increasing consumer lending by commercial banks.

• Improvement comes on the back of investment in machinery and equipment, construction investment falls
• GFI falls 0.7% y/y in November, better than expected
• Non-residential construction investment continues to explain the decline

Gross Fixed Investment (GFI) rose by 0.12% m/m in November, per seasonally adjusted data published on Wednesday by the stats office INEGI. This modest improvement is welcomed, showing the second hike in a row and confirming a modest rebound after a significant decline through Nov-Sep.

Data Download

GFI rose in November thanks to investment in machinery and equipment, with investment in construction posting its fourth m/m sa contraction in a row.

GFI declined by 0.7% y/y in November, per non-adjusted data. This was better than anticipated by the market. Indeed, the contraction was exaggerated by an adverse calendar, with GFI stagnating per working days adjusted data.

The non-adjusted contraction was crucially driven by non-residential construction investment, down by 14.7% y/y. This was the only component in the red. The decline is largely explained by a base effect, with non-residential construction investment thriving in 2023 amid expectations of a nearshoring wave that boosted industrial parks.

Overall, investment should remain weak in early 2025, in our view, hindered by slowing economic growth, poor mid-term expectations, and reigning uncertainty. The fear of potential US tariffs adds to local concerns, given unsound constitutional reforms by the MORENA regime that weaken the rule of law and the institutional framework.

• Breaks two-month declining trend, shows resilience to economic deceleration
• Private consumption grows 0.3% y/y in November, on the back of domestic goods and services
• Consumption of imported goods declines 0.7% y/y, vs a high comparison base

Private consumption grew by 0.46% m/m in November, per seasonally adjusted data published by the stats office INEGI on Wednesday. This is a very welcomed result, breaking a two-month declining trend, showing resilience in late 2024, despite a general economic slowdown, per preliminary GDP data.

Data Download

Private consumption grew 0.3% y/y in November, posting its weakest print in 2024. This weakness was in part exaggerated by a calendar effect. The non-adjusted hike came on the back of domestic goods and services, while consumption of imported goods fell by 0.7% y/y. The latter is the result of declining consumption of durable and non-durable imported goods.

Overall, weaker consumption of imported goods is consistent with the recent currency depreciation. Indeed, further weakness may come at the turn of the year, with imports becoming more expensive because of the currency depreciation seen amid fears of tariffs being imposed by the US administration. In any case, with consumer imports representing a small share of total imports, this weakness shouldn't gravely impact the trade balance, with the balance depending more on what happens with intermediate imports.

• Authorities want to increase Egypt's natural gas production

The cabinet approved five oil and gas exploration commitment agreements with Egyptian General Petroleum Corporation (EGPC), the Egyptian Natural Gas Holding Company (EGAS), South Valley Egyptian Petroleum Holding Company (Ganope), and several global companies to drill 40 wells with minimum investments of USD 225mn in the Merneith and North Sinai marine areas, and the Western and Eastern deserts, according to news reports.

Meanwhile, BP made a new oil and gas discovery in the King Mariout region on the Mediterranean Sea.

Elsewhere, ExxonMobil plans to explore two natural gas wells in two concession areas on the Mediterranean Sea during Q1 2026 at a cost of USD 240mn. The company is conducting the final seismic surveys in these areas, with indications of natural gas reserves.

EGPC plans to increase its crude oil production by 18% y/y in FY 2024/25 to 565,000 barrels per day (bpd). The companies operating under the Ministry of Petroleum are planning to add 90,000 bpd in FY 2024/25.

As a reminder, Fitch Solutions projects a 2.5% increase in gas production in 2025, followed by an additional 1.0% increase in 2026.

• Passenger cars sold rise to highest level in 30 months
• Passenger car sales recovered in 2024 due to improved FX liquidity, growing confidence
• Customs reportedly began in January clearing ports backlog of 30k passenger cars
• Egypt has announced a series of international deals to localize auto production

The number of passenger cars sold rose for the second month in a row in December, by sharp 24.7% m/m to 10.6k units following a 14.9% m/m increase in November, according to local newspapers citing data from the Automotive Information Council (AMIC). It should be noted that AMIC is an industry association, which only reports data submitted by its member car dealerships. This is the highest number of passenger cars sold in 30 months, suggesting sales have bottomed out. Total auto sales - which include buses and trucks - rose by 24.5% y/y to 13.0k units, which was underpinned by strong 19.9% m/m growth that was mostly due to rising passenger car sales. That category expanded by strong 26.6% y/y, following a 7.4% y/y increase previously, and truck sales rose as well.

The passenger car sales have been on a path of strong recovery last year as FX liquidity and consumer confidence improved and FX uncertainty eased since the major currency reform from March. Further, the CBE started to clear the FX backlogs that had dragged on imports for a couple of years, and we expect that the import of vehicles will continue to recover in 2025 and may actually return to the 2021 levels (an average of 11k passenger cars sold every month). Meanwhile, Egypt has over the past two months announced a series of international deals to localize the production of automobiles, including e-vehicles.

Data Download

Following new rules and regulations, the customs authority began in January clearing the backlog of passenger cars that have accumulated at the ports, according to one of the automotive dealer associations. The backlog is estimated at around 30,000 vehicles. We haven't seen details of the new clearing rules, but the local press reported that the new criteria will address many of the clearing issues and also include a fine of no more than EGP 10,000 (USD 200) per stranded vehicle.

UAE eyes airport management opportunities in Egypt (Ahram Online)

Egypt-Saudi Arabia trade volume grows by 18% in 2024 (Ahram Online)

Egypt signs USD 1.6bn deal with ITFC to finance work programs for 2025 (Ahram Online)

Egypt and EBRD establish EUR 10mn fund to boost private sector involvement in infrastructure (Egypt Today)

Egypt and Spain sign EUR 1.4mn grant agreement for Cairo Metro expansion feasibility study (Egypt Today)

Egypt and EBRD sign agreements to boost Public-Private Partnerships (Daily News Egypt)

• Egypt received USD 24bn in fresh funds from UAE; IMF disbursed USD 2.4bn since March
• IMF has concluded fourth review of its loan program, analysts expect USD 1.2bn tranche in February
• Egypt has secured USD 57bn external financing for 2024-27, which bolstered investor confidence
• Foreign funds have been buying T-bills through local bourse and from local banks
• CBE's FX deposits in domestic banks, which are available as a source of FX liquidity, rise to USD 10.2bn

Egypt's net international reserves edged up by USD 160mn m/m to USD 47.3bn as of end-January, creeping up to the highest level in more than two decades, according to the central bank. The m/m increase was driven by Foreign currency reserves with other central banks, BIS and IMF (+USD 113mn) as well as rising value of gold reserves (+USD 772mn), which offset a USD 793mn m/m drop in Other reserve assets (other than derivatives and loans to non-residents). FX reserves have surged since March 2024 as Egypt received USD 24bn in fresh funds from the UAE, while the UAE converted another USD 11bn of deposits at the CBE into direct investments. The securing of this major deal allowed Egypt to implement the long-delayed float of the pound, which was accompanied by a 600bps interest rate hike. Following the reform, the IMF promised USD 8bn in augmented financing and a separate USD 1.2bn climate-related financing. Egypt received the first three tranches of the IMF program (each of USD 820mn) last year and expects USD 1.2bn tranche in February 2025.

Data Download

IMF's program is centered on a liberalized foreign exchange system in the context of a flexible FX rate regime, a significant tightening of the policy mix, reducing public investment, and delivering on structural reforms to allow the private sector to become the engine of economic growth. The FX reform eliminated the black FX market and has boosted liquidity in the official banking system. Further, CBE is committed to clearing the FX backlog and FX arrears that have accumulated over the past couple of years and will stop providing direct financing to the government, which has put pressure on the pound. Further, the CBE has not intervened in the FX market since March 2024. In addition to the UAE deal and the augmented IMF program, Egypt has also secured USD 8bn soft loans and grants from the EU for 2024-27 and USD 6bn loan from the World Bank.

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The securing of the massive USD 57bn financing and the FX currency reform bolstered investors' confidence and foreign investors rushed to buy short-term debt. Foreign funds bought around USD 18bn worth of T-bills and bonds on EGX's secondary market and another USD 8bn directly from the banks, the latter boosting the foreign assets of the commercial banks and resulting in a surplus of the banks' NFAs for the first time in two years. Meanwhile, CBE's FX deposits in domestic banks, which are available as a source of FX liquidity, edged up to USD 10.2bn as of end-January. The pound has come under pressure in August during the global sell-off and then again in December on the back of seasonal demand pressures as well as global and regional factors. The CBE allowed the pound to weaken, which we think was a healthy indicator of the CBE's commitment to the new flexible FX rate regime.

• Commercial banks' foreign assets rebound in December, but rising liabilities push their NFAs deeper into deficit
• Sharp declines in banks' NFAs are usually result of capital outflows
• Foreign funds bought USD 2.3bn worth of T-bills/bonds through local bourse in December
• NFAs turned to surplus in May - first in two years - due to USD 35bn UAE deal, surging portfolio inflows

The Net Foreign Assets (NFA) of the banking system (banks + CBE) fell by EGP 30bn or 10.1% m/m to EGP 266bn (USD 5.3bn) as of end-December following a sharp 34.4% m/m drop in November, according to data released by the central bank. The drop was due to a system-wide increase in foreign liabilities exceeding the rising stock of foreign assets at the banks and the CBE. We remind the bank's foreign assets fell by sharp EGP 289bn m/m in November, and such sharp movements are usually the result of portfolio outflows. However, the banks' foreign assets recovered by EGP 110bn m/m in December, which we attribute to portfolio inflows and external financing, as the bank's foreign liabilities rose by EGP 146bn on the month. As a result, the NFAs of the banks fell deeper into negative territory, reaching net liability of EGP 327bn as of end-December. We note that the stock market recorded a net acquisition of T-bills/bonds by foreign funds worth USD 2.3bn and we thought the banks' foreign assets should have risen by more. The drop in banks' foreign assets could be related to increased seasonal demand for imported goods and larger gas imports. Meanwhile, the central bank's NFAs held relatively stable m/m at EGP 592bn asset position.

Data Download

We remind the system-wide NFAs stood at USD 22bn net liability as of end-February 2024 and their sharp improvement was due to USD 35bn UAE deal and a surge of portfolio inflows that followed the pound's float and the securing of massive external financing. In fact, the NFAs recorded their first surplus in more than two years in May. While Egypt has managed to improve its resilience to external shocks thanks to recent reforms and relatively large external reserves, the massive inflow of hot money has raised the risks related to capital outflows and roll over risks. On a positive note, it seems the foreign funds started to return to the local debt market in early January.

• Next MPC meeting: Feb 20, 2025
• Current policy rate: 27.75%
• EmergingMarketWatch forecast: 26.75-26.25%

The MPC will hold a regular rate-setting meeting on Feb 20 and we think the committee may finally launch the monetary easing cycle with a 100-150bps rate cut. Consumer inflation has been on a downward trend since it peaked at 37.9% y/y in September 2024, interrupted by fuel and electricity price hikes during 2024. The slowdown is expected to continue throughout 2025, supported by favourable base effects, tight policy stance, steady disinflation in the heavy-weight food category, and improvement in inflation expectations since the currency reform from March 2024. Further, market reports suggest foreign portfolio investors have returned to the debt market since the start of 2025, and regional tensions appear to be easing under a ceasefire agreement in Gaza. Should the ceasefire agreement hold and the hostilities in the Red Sea subside, the traffic through the Suez Canal - a key FX earner for Egypt - is expected to gradually recover. The FX rate has weakened slightly since November, which was attributed to seasonal increase in demand for hard currency, capital outflows, and payments for gas imports and arrears to international energy companies. However, the depreciation is relatively mild and the pound is likely to stabilize near current levels.

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There are, however, risks to the disinflation path, such as regional tensions, higher than anticipated pass-through of fiscal measures, and global supply line disruptions due to higher tariffs. While energy commodity prices have mostly moderated, commodity prices continue to be susceptible to supply shocks such as global trade disruptions and adverse weather conditions. We believe the MPC will take these risks into account and will implement a cautious 100-150bps rate later this month. Further, education costs are expected to be raised in February, as Egypt had postponed the adjustment that was due in October, which may add a full percentage point to the headline inflation rate.

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The MPC has delivered a massive 19pps interest rate increase and 400bps increase in the required reserve ratio since March 2022, but consumer inflation remains broad-based, reflecting FX pass-through, surging food prices, supply line disruptions, and robust monetary expansion. In the last meeting for 2024, the MPC also decided to extend the inflation target horizons to Q4 2026 and Q4 2028 at 7% (+/- 2.0pps) and 5% (+/- 2.0pps) on average, respectively, in line with CBE's gradual advance towards implementing a fully-fledged inflation targeting regime.

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Monetary Policy Committee Statement

Monetary Policy Review

Monetary Policy Committee Meeting Schedule

• Banking environment to remain positive in 2025

UAE banks recorded their highest profitability in 2024, with a sector average operating profit estimated at 3.4% of risk weighted assets, up from 3.2% in 2023, according to Fitch Ratings.

The improvement was driven by a still healthy net interest margin (NIM), coupled with reduced loan impairment charges (LICs) due to a limited inflow of new impaired exposures, and reasonable coverage of already crystallised Stage 3 loans at most banks.

The banking sector's average NIM was 3.1% in during the first nine months of 2024, down from a peak of 3.2% in 2023 due to lower interest rates in the first half of 2024 and market expectations of further cuts in 2025.

Meanwhile, LICs consumed only 7% of pre-impairment operating profit during the first nine months of 2024, compared with 15% in 2023. The agency expects the sector's average NIM to decline 10bps - 20bps in 2025 and LICs to rise moderately relative to 2024 averages.

The favourable operating environment also supports asset-quality metrics, with the banking sector's average Stage 3 loans ratio declining to 4.4% at end-Q3 2024 from 5.1% at end-2023 and 6% at end-2022. The sector's Stage 2 loans ratio also fell, to 4.9% at end-Q3 2024 from 5.7% at end-2023 and 6% at end-2022.

Fitch Ratings expects the banking sector's Stage 3 loans to decrease further in 2025 to 4%, barring macro-economic shocks.

• Inflow of USD 45mn during week
• Outflow of USD 3mn during all of January

Foreign investors purchased shares worth AED 1.7n (USD 461mn) on the Dubai Financial Market (DFM) during the week ended Jan 31 and sold shares worth AED 1.5bn (USD 416mn), according to DFM data. This means that net foreign investment was an inflow of AED 164mn (USD 45mn) during the week.

Data Download

The total value of equity deals was AED 3.2bn during the review week. Thus, the value of shares bought and sold by foreign investors accounted for 51% and 46% of the total value of shares traded during the week, respectively. Institutional investors bought and sold shares accounting for 61% and 69% of the total value of equity purchases during the week, with individual investors accounting for the balance.

Let's look at what happened during all of January. Foreign investors purchased shares worth AED 7.7bn (USD 2.1bn) and sold shares worth AED 7.7bn (USD 2.1bn). That means there was an outflow of AED 12mn (USD 3mn) during the January.

• We expect 2025 to set another record

The UAE's non-oil trade increased 15% and reached a record AED 3tn (USD 817bn) by the end of 2024, said Prime Minister Sheikh Mohammed bin Rashid Al Maktoum, according to news reports.

We expect the trend to continue and non-oil trade to achieve another record in 2025. Our optimism is based on the fact that the World Bank expects overall economic growth to accelerate to 4.0% in 2025 from 3.3% in 2024.

Additionally, the UAE continues to sign Comprehensive Economic Partnership Agreements (CEPA) with various countries, thus accelerating non-oil trade.

• CBN will suspend licenses of BDCs or authorized dealer banks that divert funds or violate guidelines
• BDCs must purchase weekly FX from only one preferred bank, capped at USD 25,000

The CBN announced on Wednesday (Feb 5) that it will suspend the licenses of any bureau de change (BDC) or authorized dealer banks that divert funds or violate the newly introduced foreign exchange trade guidelines. In a circular signed by the acting director of the trade and exchange department, W. J. Kanya, the CBN outlined specific rules for the purchase and sale of FX, including that BDCs must procure their weekly FX allocation from only one preferred bank. These guidelines allow BDCs temporary access to purchase foreign exchange from authorized dealer banks, subject to a weekly limit of USD 25,000. The CBN has also set a cap of USD 5,000 per transaction per BDC on foreign exchange purchases, with strict compliance requirements including daily reporting on purchases and sales. In the guidelines, BDCs are instructed to sell the foreign exchange to end-users with a margin of no more than 1% above the buying rate. The funds purchased can only be used for eligible transactions such as business travel allowance, personal travel allowance, overseas school fees and medical fees.

• NGN 1tn is allocated for solid minerals development, NGN 1.5tn for Bank of Agriculture recapitalization
• NGN 500bn is earmarked for Bank of Industry, NGN 1.5tn directed to key infrastructure projects
• An additional NGN 120bn is set for military aviation

President Bola Tinubu's decision to raise the 2025 budget from NGN 49.7tn to NGN 54.2tn is aimed at boosting funding for agriculture, industry and solid minerals. Budget minister Atiku Bagudu said the additional funds would be used to support the government's diversification program, enhancing economic resilience by investing in non-oil sectors. The proposed allocations include NGN 1tn for the ministry of solid minerals development to unlock potential in the solid minerals sector, NGN 1.5tn for the recapitalization of the Bank of Agriculture and NGN 500bn for the Bank of Industry. Other allocations include NGN 1.5tn for critical infrastructure projects and NGN 120bn for military aviation. The increases are driven by over NGN 4.5tn in additional revenue generated by federal agencies, including the Federal Inland Revenue Service, the Nigeria Customs Service and other government-owned enterprises.

While some analysts express concerns about the fiscal impact of the increased spending, others welcome the move. Critics like economist Marcel Okeke argue that the timing of the adjustment, less than two months before the new year, creates uncertainty. They suggest that a supplementary budget would have been more appropriate. Furthermore, concerns were raised about the potential inflationary effects, with experts like Paul Alaje noting that the increased expenditure might jeopardize the government's inflation target of 15%. Despite the criticism, many members of the national assembly expressed their support for the increase. The national assembly has pledged to pass the Appropriation Bill by the end of February.

• Refinery now supplies 2/3 of Nigeria's aviation fuel and nearly 50% of West Africa's demand
• Nigeria's reliance on jet fuel imports dropped from 13,000 b/d in 2023 to 5,000 b/d in 2024
• Oando Plc announced a reward of 1.28bn additional shares to shareholders, at NGN 97.6bn

The Dangote Refinery has expanded its presence in the petroleum sector by exporting two cargoes of aviation fuel to Saudi Aramco. The refinery now supplies at least two-thirds of Nigeria's aviation fuel and nearly half of West Africa's consumption. Since its launch, the Dangote Refinery has supplied JET A1 fuel to the domestic aviation industry and begun exporting to international markets, including Iceland and London. Its aviation fuel is now recommended for use at major airports, including Heathrow in the UK. The refinery's notable transactions include a first-time jet fuel purchase by British Petroleum and a low-sulfur straight-run fuel oil shipment to Singapore. Reports say Nigeria's reliance on jet fuel imports has decreased from 13,000 b/d in 2023 to 5,000 b/d in 2024.

Meanwhile, Oando Plc, Nigeria's leading integrated oil and gas company, announced it will reward shareholders by offering 1.28bn additional shares, valued at NGN 97.6bn. This move comes after a record revenue of NGN 4.1tn for 2024, marking a 45% growth from the previous year. Oando's stock dividend distribution is seen as a way to maintain financial stability while providing shareholders with the option to hold onto shares for future growth, rather than paying cash dividends. This announcement follows Oando's acquisition of Nigerian Agip Oil Company (NAOC) in Aug 2024.

Dangote refinery, FCCPC differ as NNPCL insists on fuel import (Punch)

Foreign investors eye Nigeria's lithium reserves amid rising global demand (Punch)

Crude production cost rises to $40/barrel - Report (Punch)

Oil operators' indebtedness to FG hits $6.1bn - NEITI (Punch)

N54tn budget: Experts divided over raise, FG adds N4.5tn agric, infrastructure funds (Punch)

History As Dangote Refinery Exports Two Cargoes Of Jet Fuel To Saudi Aramco (ThisDay)

Shettima: Nigeria Must Utilise Public Debt For Infrastructure Devt (ThisDay)

House Directs NCC To Investigate Illegal Linking Of NIN By Telecom Operators (ThisDay)

Excess government spending poses biggest challenge to monetary policy in Nigeria - MPC member (Nairametrics)

ICPC recovers N20 billion in 'ghost workers' pension deductions in 2024 (Nairametrics)

• NEITI reported that operators owe outstanding royalties, taxes and rents as of Aug 2024
• Sector revenues declined by 13.7% from USD 35.78bn in 2022 to USD 30.86bn in 2023
• Crude losses dropped from 36.6mn barrels in 2022 to 7.68mn barrels in 2023, due to improved security

The Nigeria Extractive Industries Transparency Initiative (NEITI) revealed that as of Aug 2024, oil and gas operators owe the federal government a total of USD 6.1bn in outstanding royalties, taxes, rents and other collectible revenues. NEITI advised the government to prioritize recovering these funds to support the 2025 budget. The agency's executive secretary Ogbonnaya Orji made this recommendation on Wednesday (Feb 5) while briefing the senate committee on public accounts on the findings of NEITI's industry reports covering the oil, gas and mining sectors for 2021, 2022 and 2023.

Despite some improvements in the oil and gas sector, NEITI reported a 13.7% decline in sector revenues, dropping from USD 35.78bn in 2022 to USD 30.86bn in 2023. However, crude oil losses fell significantly by 78%, from 36.6mn barrels in 2022 to 7.68mn barrels in 2023. Orji attributed this progress to enhanced pipeline surveillance by the office of the national security adviser, the armed forces and security agencies. He also emphasized the need for host communities to take greater ownership in preventing crude oil theft and cautioned against the indiscriminate dismissal of skilled workers, which could lead to increased vandalism of oil infrastructure.

NEITI's reports further highlighted a continued decline in the sector's contribution to GDP, falling from 7.24% in 2021 to 5.48% in 2023. Gas production also saw a slight drop from 2.52bn scf in 2022 to 2.49bn scf in 2023. Orji called for stronger alignment between Nigeria's gas commercialization policies, energy transition plans and the Climate Change Act to support clean energy development. Meanwhile, he expressed concern over the poor performance of the solid minerals sector, noting that it does not reflect the country's vast mineral resources.

• Tinubu requested the national assembly to increase the 2025 budget to NGN 54.2tn
• Additional revenue from key agencies such as FIRS and NCS enabled the increase
• FIRS added additional NGN 1.4tn, NCS generated NGN 1.2tn and others raised NGN 1.8tn

President Bola Tinubu has requested the national assembly to increase the 2025 budget by NGN 4.5tn, raising the total from NGN 49.7tn to NGN 54.2tn. This request was formally presented in a letter read by senate president Godswill Akpabio and deputy speaker Benjamin Kalu during plenary on Wednesday (Feb 5). Tinubu said the budget increase was made possible by the additional revenue generated by government agencies in 2024, including the Federal Inland Revenue Service (FIRS) and Nigeria Customs Service (NCS). Specifically, FIRS contributed an extra NGN 1.4tn, NCS generated an additional NGN 1.2tn and other agencies raised NGN 1.8tn. This revenue surge is expected to support the country's financial needs and development agenda.

Initially presented in Dec 2024, the 2025 budget of NGN 47.9tn projected a budget deficit of 3.89% of GDP, amounting to approximately NGN 13tn. The federal government said the spending plan was focused on macroeconomic stability, poverty reduction and human capital development. However, the national assembly has already raised concerns about financial mismanagement, extravagant spending and unaccounted funds during budget defence sessions. Despite these issues, Tinubu said the additional revenue will help prioritize Nigeria's most pressing needs. The senate has been directed to swiftly consider the budget increase. The national assembly is expected to pass it by the end of February for the president's approval.

• Most economists expect 25bps rate cut
• Malhotra less interventionist with INR management

India's new central bank governor, Sanjay Malhotra, is expected to announce an interest rate cut in his first Monetary Policy Committee (MPC) meeting, as the Reserve Bank of India (RBI) shifts its focus towards supporting economic growth amid global uncertainties. According to a Bloomberg survey, most economists predict that the RBI will lower the benchmark repo rate by 25bps to 6.25% on Friday. Some analysts believe there is a possibility of a larger 50bps cut.

Malhotra, who took office in mid-December, is chairing an almost entirely new six-member MPC. Deputy Governor M. Rajeshwar Rao has temporarily replaced Michael Patra, who retired last month, while three new external members joined in October. Malhotra has not made public statements on inflation and currency policy, but RBI insiders indicate that he favors a less interventionist approach to the rupee than his predecessor, Shaktikanta Das. Since his appointment, the rupee has depreciated over 3% against the dollar, reflecting increased volatility compared to the managed approach under Das.

A rate cut would follow the government's USD 12bn tax relief announced in the Union Budget, aimed at stimulating consumption. Recent economic data has also shown slower-than-expected growth, while US President Donald Trump's tariff threats have created fresh uncertainty in global markets.

Malhotra is scheduled to announce the RBI's rate decision at 10 a.m. in Mumbai. This decision will be closely tracked to get signals on his policy stance, future rate-cut trajectory, and views on the rupee and liquidity management.

Click here for our comprehensive database of macro forecasts.

• 60.42% voter turnout
• BJP in the lead according to most exit polls
• Congress to secure minimal or no seats

Exit polls for the 2025 Delhi Assembly elections indicate a significant shift in the capital's political landscape. The Bharatiya Janata Party (BJP) is projected to secure a majority in the 70-member assembly, marking a potential end to the Aam Aadmi Party's (AAP) decade-long governance.

In the 2025 Delhi Assembly elections, approximately 60.42% of the 15.6mn eligible voters cast their ballots, marking the lowest voter turnout since 2008, which saw a 57.8% participation rate. This provisional figure is subject to revision as final data becomes available. The current turnout reflects a decline from previous years, with 66% in 2013, a record 67.5% in 2015, and 62.8% in 2020. Notably, the 2024 Lok Sabha elections held in May had a turnout of 58.6%.

The Election Commission has indicated that these turnout figures are provisional and will be updated in the coming days. The election featured three major political parties-Aam Aadmi Party (AAP), Bharatiya Janata Party (BJP), and Congress-competing for 70 assembly seats. Polling was largely peaceful, with no significant incidents reported. The counting of votes is scheduled for February 8, and if a clear majority emerges, the new government is expected to be formed by February 11.

Various exit polls have provided the following seat projections:

These projections suggest a resurgence for the BJP in Delhi, a region where it has not held power for over two decades. The anticipated outcome is a considerable setback for AAP, led by Arvind Kejriwal, which has maintained a stronghold in the capital since its inception. It's important to note that exit polls have a mixed track record in accurately predicting election results in India. The results are expected to be declared on February 8.