• It brought the borrowed amount to CZK 11.3bn, quite above the CZK 9bn borrowing ceiling
• The finance ministry also purchased CZK 13bn of bonds into its portfolio
• We estimate that gross financing needs were covered at almost 44% as of Jun 4

The finance ministry topped up the government bond auction on Jun 4 by CZK 0.95bn, according to figures from the CNB. It brought the total borrowed amount to CZK 11.3bn, or quite above the borrowing ceiling of CZK 9bn. We expected this would be the case, given that borrowing costs were visibly more favourable this time. As a result, gross bond issuance reached 54% of the monthly borrowing ceiling, with two more bond auctions scheduled in June. We remind that the finance ministry typically doesn't top up auctions for money market instruments, which is why the borrowed amount for the T-bill offered on Jun 4 remains at EUR 500mn, exactly at the ceiling. The finance ministry also bought CZK 13bn of government bonds into its portfolio, one of the larger purchases this year.

As a result, we estimate that the gross issuance of debt instruments that mature after the end of 2025 reached CZK 210.2bn as of Jun 5. The amount breaks down as follows:

• CZK 167.5bn in CZK-denominated bonds;
• CZK 29bn in bond purchases to the issuer's portfolio;
• CZK 12.7bn in CZK-denominated T-bills;
• CZK 1.1bn in retail bonds (Q1 2025 only).

There was also a net inflow of CZK 44.3bn from operations with financial assets in Q1 2025. The debt funding strategy assumes a net inflow of only CZK 7.4bn in 2025, however, which is why we tend to use that number, at least until full-year data is available. Gross financing needs are projected at CZK 563.5bn in 2025, which means they were covered at 43.9% as of Jun 4. If all flows from operations with financial assets are included, the cover ratio reaches 45.2%. However, financial asset flows tend to fluctuate considerably, which is why we prefer not to include them.

Agreement on Dukovany is ready. Now, the Czech Republic must deal with financing (Hospodarske Noviny)

Government signs agreement on Dukovany with Koreans (Lidove Noviny)

Dukovany: a lightning-fast signing (Mlada Fronta Dnes)

Government signs agreement on Dukovany expansion with Koreans (Pravo)

Signed. Koreans to expand Dukovany power plant for hundreds of billions of CZK (E15)

Blazek's donor is putting away bitcoin (Mlada Fronta Dnes)

Spolu coalition loses bitcoin fans because of Blazek (Pravo)

Can we reach the top 10 of countries in AI, like the government wants? Yes, but paper is not enough (Lidove Noviny)

Shortake of skilled workers delays faster introduction of AI more than money (E15)

How is farmland "flipped"? (Hospodarske Noviny)

• KSCM climbs to fourth place, 6 parties are set to enter parliament
• We consider the results already outdated, due to the bitcoin donation scandal

ANO, the leading opposition party, maintained its lead in May, polling at 34.1% (down 0.3pps m/m), according to the latest opinion poll of Ipsos, carried out between May 26 and Jun 1. Despite the slight decline, ANO's lead to Spolu increased, as Spolu polled at 20.6%, down 1.1pps m/m. We doubt that Spolu's loss was due to the bitcoin donation scandal, which surfaced on May 30, and was likely not caught by the survey. We expect this to figure more prominently in the June poll of Ipsos, when we expect Spolu to perform worse. In any case, ANO's lead returned to a solid 13.5pps, even though other recent polling has been placing it at slightly less than 10pps.

Only the KSCM reported a big change among the next 4 parties, gaining 0.6pps to 6.4%, putting it fifth. The SPD remains third, followed by STAN, the KSCM, and the Pirates, all of which are fairly certain to pass the 5% electoral threshold. The Motorists remain just below that line, polling at 4.6% (up 0.1pps m/m). Similar to the ANO-Spolu gap, the Motorists are outperforming most other recent polling, which places it under 4%.

At this point, we would argue that all polling that is about to be published in the next week or so is outdated, mostly due to the bitcoin donation scandal. The government did manage to score a win on Wednesday (Jun 4) by signing the final agreement with KHNP on the Dukovany nuclear power plant. However, that is a project that will start providing dividends in the late 2030s, and voters will be much more sensitive to current events. Thus, we expect that ANO will regain ground, while Spolu will see some hard times in the polls.

• The project is estimated to cost about EUR 16.3bn for the two units the Czech government ordered
• Construction of the first unit is planned to start in 2029 and be completed in 2036
• Financing will be secured through government loans, as the state now controls an effective 94% of the Dukovany nuclear plant; more details pending
• Risks remain in place, as EDF's appeal of the tender is still pending, at a local court and the European Commission

The Czech government signed a final agreement with KHNP, a Korean energy firm, on the expansion of the Dukovany nuclear power plant, PM Petr Fiala announced after the regular cabinet meeting on Wednesday (Jun 4). The decision comes immediately after the Supreme Administrative Court lifted the temporary injunction on the agreement. The cost of the project is expected to reach CZK 407bn (about EUR 16.3bn) for the two units ordered by the Czech government. Each unit will have a capacity of 2.1 GW. The construction of the first unit is planned to start in 2029 and be completed in 2036. KHNP will subcontract 60% of construction works to Czech firms, with 30% of orders ready to be signed already. The first new unit will replace 4 Soviet-era units whose operational life will expire in the late 2030s. The construction of the second unit should start some time in the next decade.

Financing for the project will be secured through government loans, which was deemed the cheapest way to secure the necessary funds. We remind that the Czech government acquired 80% of the Dukovany nuclear power plant (through the newly established EDU II company), with the remaining 20% held by CEZ. As the state already has 70% in CEZ, it will effectively hold a 94% stake in EDU II. We expect the finance ministry will reveal more details about the financing plan for the project soon, now that the final agreement has been signed. The negotiated delivery price for power generated by the new unit is EUR 90/MWh, with an almost 10-year commitment.

There are still risks for the project, as the Supreme Administrative Court did not strike down EDF's appeal of the tender for the Dukovany expansion, which led to the injunction. The Brno regional court will hold the first hearing on the case on Jun 25, though a final ruling is unlikely to come so soon. EDF also appealed the tender outcome to the European Commission, claiming that KHNP has been using non-EU subsidies. The EC has not provided a timeline for its probe, though it is expected to take place soon. We would argue that the burden of proof is on EDF in this case, as it needs to provide evidence that KHNP has violated EU market rules. Czech industry minister Lukas Vlcek said that the Czech government had presented all required information to the EC, and he is confident everything is in order. Even then, there is a risk of delays, which will hang over the project for a while.

In the end, this is an important milestone for this government, which has made the project an integral part of its energy security and self-sufficiency strategy. If the project fails, it will be a big blunder, but at least for now, things are brightening up.

• Babis prefers not to make compromises with his programme, and gave the EU as an example of how negotiations made things difficult
• He would not mind if the Motorists make it to the next parliament, expects the SPD to be there
• We see this as the ideal scenario for ANO, but we doubt Babis will have that luxury
• We suspect Babis is aiming for a scenario where ANO is close enough to a majority so it could negotiate a confidence & supply agreement

ANO would much rather rule on its own after the next general election on Oct 3-4, ANO leader Andrej Babis told Nova, a TV channel. His rationale is that ANO would need to make compromises if in a coalition, and he gave the European Union as an example, where negotiating with partners took much too long. Instead, he would love to be in the situation of US President Donald Trump, ruling through executive orders.

Regarding potential allies, Babis said he would not mind if the Motorists made it to the next parliament, yet that was far from certain. To provide context, the Motorists are a relatively new party, which did very well in the European Parliament election last year, winning almost 10% of the vote. However, it has been polling at about 3.5% lately, which puts it too far from the 5% electoral threshold. The Motorists have a strong populist message, with a conservative lean, both in fiscal and social affairs. Babis did not address the SPD that much, saying they would certainly be present in the next parliament. This is stating the obvious, as the party is polling at about 11-12% currently.

We reckon what Babis described is the ideal scenario for ANO, but we doubt he will have that luxury. Current polling suggests ANO will need the SPD to establish an absolute majority, with no other options being viable. Yet, this is based on polling before the bitcoin donation scandal, which could turn things around, allowing ANO to form a minority government. We suspect this is what Babis is hoping for, getting close enough to an absolute majority so that he could negotiate a confidence & supply agreement with whomever agrees to it. In the end, Babis will act according to circumstances, so we don't see his remark as something set in stone.

• Next MPC meeting: Jun 25, 2025
• Current policy rate: 3.50%
• EmergingMarketWatch forecast: hold

Rationale: We believe we have seen the last rate cut from the CNB until Q4 2025. While the tone of the post-meeting statement for the MPC meeting in May was not too hawkish, as well as the debate itself, the remarks of CNB governor Ales Michl were. The May cut was justified by lower external inflation risks, as global oil prices have been falling. However, domestic inflation pressure has remained strong, and with no sign of easing. The new staff forecast also envisages a rate cut in Q2 2025 (though to a level around 3%) and then broadly stable rates, something Michl pointed out in the post-meeting press conference. We don't believe that was accidental, as well as his comment that further monetary easing would be conditional on lower domestic inflation risks.

There was also one dissenting vote in the decision to cut in May. A bit surprising, it was Jan Kubicek, rather than Eva Zamrazilova. In all fairness, Kubicek had not shared any remarks before the MPC meeting in May, so we had no way of knowing how hawkish his position had turned. Concerns about core inflation persisted among some board members, though not all gave a big weight to the forecast's projections of core inflation reaching 2.7% y/y in June. The CPI prints for April and May will likely change that, as they show a persistent acceleration in core inflation. Core prices rose by 2.6% y/y in April, and their growth may have accelerated to 2.7% y/y in May, according to the latest flash release. Meanwhile, the slowdown in headline inflation in April was quickly reversed in May, with food prices being on the rise once more. Service price inflation remains sticky, despite a stronger CZK and slower-than-expected economic recovery. Furthermore, property prices and mortgage lending have resumed growth, and the labour market remains impressively tight, even during a manufacturing downturn that has been going on for the past 3 years.

Thus, we believe that the bar for any future rate cut has been raised higher. It will take a noticeable deceleration in core inflation, as well as lower wage growth pressure, before the CNB board eases monetary policy further. The Q1 wage print showed that wages rose almost entirely in line with the CNB's projections, which have been of concern for the CNB board. It is worth noting that the new forecast did not lower the GDP growth forecast for 2025, which remains at 2%. However, the structure of GDP growth was considerably revised, with household consumption now getting a much bigger weight, to the expense of investment and exports. Given the emphasis given on price stability by the CNB board lately, we expect that it will be more cautious than usual, and deliver another rate cut only when it thinks domestic structural issues have weakened their impact. We have already got some glimpse of how thinking on the CNB board may change, as most board members said they would be much more cautious from here on. Zamrazilova even went on to say the 25bp cut in May could be the last one she supports in 2025.

Regarding the other direction, a rate hike cannot be fully ruled out, though we expect this one will largely depend on external developments. For example, a (temporary) supply shock caused by global trade restrictions could be the trigger for tightening monetary policy, as well as renewed energy price growth. The probability of that is not extremely high at this point, though we cannot completely rule out such a scenario in the near future. The main risk is geopolitical, as China has been restricting exports of precious metals to the US, and by extension, Europe, which has started to provoke concerns. The latest news about US-China trade talks have turned sour lately, though this could easily change quickly yet again.

Our base expectation is that the policy will remain stable in the coming months, and that we won't see another cut before core inflation nears the headline again. We expect it to happen in Q4 2025 at the earliest, which is why we don't rule out a third rate cut this year.

Data Download

Data Download

Further Reading:

CNB board statement from latest MPC meeting, May 7, 2025

Post-meeting press conference, May 7, 2025 (in Czech)

Q&A after the latest MPC meeting, May 7, 2025

Minutes from the latest MPC meeting, May 7, 2025

Monetary Policy Report, May 2025

Macroeconomic forecast, May 2025

Meeting with analysts, May 12, 2025

CNB board profile

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

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

• EC granted the escape clause to a total of 16 member states
• Net expenditure growth remains within recommended limits even without the escape clause
• The Czech Republic continues not being a subject for an in-depth review, so no major imbalances reported

The European Commission approved the application of the national escape clause for the Czech Republic, according to the latest European Semester package. We remind that the escape clause allows member states not to include defence spending exceeding 2% of GDP for the purposes of the EDP. The Czech government is among 16 member states who requested the activation of the escape clause. It is worth noting that the Czech Republic is among 6 member states whose net expenditure is projected to grow within the ceiling recommended by the European Council, so it doesn't need the escape clause yet. In contrast, there are 5 member states whose net expenditure would exceed the recommended ceiling, but the deviation is within the flexibility granted by the escape clause.

We would like to make an important remark here, related to political developments. The current government is firmly committed to raising defence spending at least to 3% of GDP, and possibly even further. However, the same cannot be said for ANO, the leading opposition party, who is most likely to lead the next Czech government. Officially, ANO has been elusive, but we have heard consistent remarks by senior ANO members that any increase in defence spending should be effective. Furthermore, they doubt the Czech armed forces have the capacity to absorb much higher spending at this point. Thus, we have serious doubts that ANO will push defence spending growth with the same vigour as the current government. Speaking of which, ANO is much more lukewarm on support to Ukraine than the current government, and the odds are that military aid will decrease considerably, thus reducing further the need for a defence spending hike. We understand this may appear to be a bold statement. However, we remind that last year, ANO left the Renew group in the European Parliament and became a founding member of Patriots for Europe, along with Hungary's Viktor Orban (Fidesz) and Austria's Herbert Kickl (FPO).

Moving on to specific country recommendations, there hasn't been a major change from previous years. The Czech Republic is not a subject to an in-depth review, which is why recommendations have remained limited. The main recommendations include optimisation of the tax system, acceleration in the implementation of the Recovery Plan, strengthening of administrative capacity (with a focus on IT skills), strengthening capital markets and non-bank financing, reducing dependence on fossil fuels, and better incentives for parents returning to work. Some structural issues remain in place, like the wide gender pay gap, a direct consequence of the gap in the employment rate for men and women. More investment in innovation, digitalisation of public services, and development of public investment is also encouraged. Overall, however, remarks on the Czech economy remain muted, as it doesn't perform worse than the EU average.

• Cumulative sales reached 100.4k units, up by 5.7% y/y in January-May
• Skoda Auto outperformed the market again, with sales rising by 6.4% y/y in May and 7% y/y in January-May
• Sales of electric cars and plug-in hybrids were again the main growth driver, followed by petrol cars
• The EV segment still has a low market share, at 9.5% in January-May, but it almost doubled from 5.1% a year ago
• Used passenger car sales rose by 4.4% y/y in May and 1.7% y/y in January-May

New passenger car sales rose by 3.8% y/y (wda) in May, adding up to 19,519 units, according to figures from the SDA, the car importers' association. In non-adjusted terms, sales fell by 1.1% y/y in May, which was due to one fewer working day when compared to a year ago. Cumulative sales rose by 5.7% y/y in January-May, up to 100,431 units. Skoda Auto did once again better than the market average, its sales rising by 6.4% y/y in May and by 7% y/y in January-May. Skoda accounted for 33% of all new passenger car sales, a market share that was higher than the next 4 makes combined.

Data Download

Regarding fuel type, the combined sales of electric cars and plug-in hybrids had the biggest impact on growth, both in May and in January-May. If taken separately, pure electric cars performed effectively the same as petrol cars, with sales growing by 8.9% y/y and 70.3% y/y, respectively. Meanwhile, plug-in hybrid sales were up 88.2% y/y, though arguably from a very low base. The situation was similar in January-May, when petrol car sales increased by 6.7% y/y, compared to sales of electric cars rising by 2.2 times in year-on-year terms, and plug-in hybrid sales jumping by 68% y/y. Diesel car sales are these that have deteriorated the most, falling by 24.7% y/y in May and by 12.7% y/y in January-May.

The market share of electric cars and plug-in hybrids is still fairly small, at 9.5% of total passenger car sales. However, it almost doubled from 5.1% for the same period of 2024, and it appears that the EV market's potential remains considerable. This is going on despite insufficient infrastructure, as there are currently 2,143 charging stations in the Czech Republic, which is approximately the number of monthly sales in the EV segment. Yet, it appears that customers are increasingly looking towards going electric, especially after fuel prices have been pretty volatile in the past decade.

Used passenger car sales rose by 4.4% y/y in May, bringing their cumulative increase to 1.7% y/y in January-May. We are not certain if the improvement will stick, given that used passenger car sales fell by 9.1% in 2024. Total motor vehicle sales, including buses, trucks, motorcycles, etc., rose by 4.2% y/y in May, out of which new vehicle sales were higher by 4% y/y. In January-May, total vehicle sales rose by 2.5% y/y, with new vehicle sales being higher by 2.5% y/y.

All in all, it increasingly looks that the EV segment is the future of the domestic automotive market. Infrastructure will likely be the main restraint, but with technology advancing, electric cars and plug-in hybrids will become increasingly accessible. In that regard, EV production is the only segment that has seen consistent growth in the past few years, despite weakening demand in Europe. Moreover, Czech producers have some advantage, as they still have considerably lower production costs than in Western Europe. We have seen reports that Czech automotive workers cost between 2 and 3 times less than in Germany, which is why we are not that concerned about Skoda Auto's future as part of Volkswagen Group.

• Tisza Party voters show higher electoral activity, but Fidesz has strong track record of mobilising voters
• Our Homeland, DK and MKKP also to enter the parliament, MKKP shows significant gain in June

The opposition Tisza Party has extended its popularity lead over the ruling Fidesz party to 5pps in June, according to the latest poll by the Republika Institute. Support for the Tisza Party was unchanged m/m at 32% among all voters, while Fidesz lost 1pp of support m/m to 27%. The advantage of the Tisza Party was higher at 7pps in terms of decided voters and 9pps in terms of decided voters certain to vote. In this last sample, the Tisza Party was ahead with 43% and Fidesz had 34%, the poll showed. Some 75% of Tisza Party voters' intended to participate in the elections, compared to 68% of Fidesz voters. Fidesz' voters had lower propensity to vote, the pollster commented on the results, but remarked that Fidesz has been successful in mobilising its voters before prior elections. It will be therefore important to monitor the trends in the share of people that are willing to vote, it stressed.

The majority 64% of respondents were certain to vote on the elections, while another 18% said they will probably vote, according to the poll. The share of people that were certain or were considering not voting was a combined 10% and the share of people who did not respond to the question - another 8%.

Nationalist Our Homeland was the third strongest party with 6% of support among all voters, flat m/m. The party had 8% of decided voters and 7% of decided voters certain to vote. It was followed by socialist DK with 5% among all voters. The party lost 1pp of support m/m, which we think may be related to the resignation of the party's chairman Ferenc Gyurcsany in May. DK would still enter the parliament if elections were held now, although it barely exceeded the parliamentary threshold with 6% of decided and certain voters. The anti-establishment Two-Tailed Dog Party (MKKP) strengthened visibly to overtake DK in certain voter segments, the pollster pointed out. MKKP commanded 5% of support among all voters, up by 2pps m/m, but it gained as much as 4pps m/m to 7% in terms of decided voters.

• Projects under EU recovery plan seem effectively cancelled
• Main aim seems to be to protect budget deficit, in our view

The government will authorise the EU fund managing authority to cancel tenders and suspend application for payments for projects under the EU recovery plan, according to a draft decree published for social consultation, local media reported. The suspension would be possible in case the related payment request cannot be sent to the EC, the proposal read. The EU consciously misinterpreted government measures aimed at protecting sovereignty and the related freeze of EU funds can make certain project commitments impossible, the rationale to the draft decree explained. The new rules would apply for projects that have not been contracted yet as well as to projects that were already under way. The prospective new regulation would practically mean that the government abandons any efforts to tap the EU recovery fund, thereby losing EUR 10.4bn of grants and soft loans under the facility, the media portal Portfolio commented. We think this looks the case since the government has signalled unwillingness to progress further with the rule of law super-milestones required for unlocking the EU funds and since the EC is unlikely to extend the mid-2026 deadline for submitting invoices for reimbursement.

A second draft decree published for social consultation would also allow the EU fund managing authority to declare the implementation of a project impossible and to reject the allocation of grants on such grounds. This would apply to projects under the EU cohesion funds and would concern state, municipal, public foundation organisations and companies with majority public or municipal ownership. The option for declaring a project impossible was also defined on a regional basis, applying to projects in regions for which GDP per capita exceeded the EU average, meaning only the Budapest and Pest counties. The potential cancellation of payments on projects would also apply to programmes to be financed from EU funds, which are currently blocked in whole or in part.

The proposed regulation was necessary in order to implement the projects that were still feasible and essential for key strategic interests, while maintaining budgetary stability and financial sovereignty, the government explained. We think the main aim is again to safeguard the budget, which has suffered from weak EU fund revenue for the past few years, while implicitly acknowledging no prospects for improving of relations with the EU in the medium term.

Budapest councilor from Fidesz Alexandra Szentkiralyi: Tax revenues in capital city doubled, but then disappeared (Magyar Nemzet)

Government increases framework of Sandor Demjan programme, allowing even more companies to access funds (Magyar Nemzet)

Investment agency head Istvan Joo: New strategic investments are coming to Hungary (Magyar Nemzet)

NBH governor Mihaly Varga continues negotiations with banking association (Magyar Nemzet)

BYD is already in full swing producing state-of-the-art electric buses for Hungary, they will arrive next year (Vilaggazdasag)

America's long-awaited big announcement about Hungary is on the horizon: US State Department has issued highly suggestive statement (Vilaggazdasag)

Comprehensive study was conducted on Hungarian battery value chain - here are the details (Vilaggazdasag)

Climate protection law imposed by Fidesz in 2021 is against the Fundamental Law (Heti Vilaggazdasag)

Government may cancel EU payments and tenders according to two new draft regulations (Heti Vilaggazdasag)

Political analyst Gabor Torok says Fidesz will raise the stakes after postponing vote on so-called transparency law (Heti Vilaggazdasag)

Government begins negotiations with capital Budapest, adoption of transparency law is postponed due to disputes (Heti Vilaggazdasag)

• Hungary should respect net spending growth limit in order to correct excessive deficit
• Important recommendations include diversification away from Russian energy, removing energy subsidies
• Government should reduce distortions caused by price and interest rate caps, EC says

The EC called on Hungary to raise defence spending, according to its country-specific recommendations issued as part of the Spring Semester package. At the same time, Hungary should stick to the restrictions on net budget spending growth in order to correct the excessive budget deficit, while using the escape clause to raise defence spending, it elaborated. Defence spending was expected at 2.0% in 2024 and 2025 each, it noted, adding that the escape clause would allow defence spending to be prioritised without risking mid-term fiscal sustainability. The EC projected net spending growth of 6.1% in 2025 and 8.6% cumulatively in 2024-2025. The growth was above the benchmark set under the excessive deficit procedure in 2025 but below the benchmark when considering 2024-2025, it observed.

The diversification away from Russian fossil fuel supplies was also a specific recommendation, including the removal of fossil-fuel subsidies, specifically those on diesel excises and constraints on the electrification of households. Hungary relied on Russia for more than 70% of its annual gas consumption and more than 80% for crude oil consumption in 2024, the EC noted, highlighting slow progress towards decoupling from Russian energy dependence. The EC called for removing the emergency energy subsidies, also in the context of the need for fiscal consolidation, noting that these subsidies had a net budgetary cost of 1.0% of GDP in 2024.

Economic distortions from the government intervention of the economy should be reduced by phasing out the existing interest rate and price caps, as well as equivalent measures, the EC noted. Market competition should be also strengthened by avoiding arbitrary administrative intervention and policies favouring specific companies. Emergency measures should be employed only if they were really necessary, sticking to the single market and rule of law principles, the EC stressed. The innovation framework should be improved by making public R&D spending more predictable and to improve the targeted nature of support for SMEs, it added. Improving the effectiveness of the education sector was also a necessary policy, along with facilitating access to effective active labour market measures, it said. Measures in the housing sector should be targeted at low-income households and housing supply should be also raised, in particular for social housing, it added.

• Fidesz in agreement on need to protect sovereignty, still discusses what tools to employ
• Discussion on draft bill to continue in autumn

The ruling Fidesz party will postpone the parliamentary discussion of the transparency law, Fidesz faction leader Mate Kocsis announced. The controversial draft law included new restrictions on foreign financing of domestic entities and has been met with significant protests by EU institutions, domestic opposition parties and media. Fidesz will remove the proposed law from the agenda of the parliamentary legislative committee and the parliament will not vote on the draft law before its summer recess, Kocsis said. There is still a broad agreement within Fidesz that legal means should be used to protect sovereignty, but discussions were ongoing regarding the specific tools to be used, he explained. The delay of the voting on the law will allow for feedback to be incorporated into the legislative proposal, including feedback from several professional organisations like the banking and advertising associations, the bar association and the association of newspaper publishers, he noted. Discussions on the law will continue in the autumn, he concluded.

We do not rule out that the extensive criticism against the draft bill might have forced Fidesz to re-think its approach. The European Parliament has stepped up its calls for the rule of law procedure against Hungary to be advanced and for renewed full freeze of EU funds and the EC has also assessed the proposed law as violation of EU norms. Meanwhile, Fidesz remains in precarious position domestically as most polls suggest that it continues to trail the opposition Tisza Party, showing tangible risks that it could lose next year's election.

MPC takes a break in June after May cut (Rzeczpospolita)

Tusk to send govt on a diet in the summer [PM unofficially has said ministers to be reviewed in July and reshuffle in August; coalition leaders to meet again on Thurs.] (Rzeczpospolita)

What will president do regarding the climate [Nawrocki backed coal until nuclear comes in 2035, and later, during campaign, but experts note that for lower power prices, as he also called for, more renewable energy is needed; share of coal in power has already gone below 50%] (Rzeczpospolita)

Polska 2050's deputy head: We can't pretend everything is good (Rzeczpospolita)

Line-up for pardons from Nawrocki (Gazeta Wyborcza)

Who will go with Nawrocki to President's Palace (Gazeta Wyborcza)

First election in history in which internet played large role [and on that Nawrocki's campaign did much better than Trzaskowski's] (Gazeta Wyborcza)

First prosecutorial charges for Pegasus affair (Rzeczpospolita)

'Fourteenth' pension payment to be revised [revision to have payment made in September this year] (Rzeczpospolita)

What next with Trzaskowski (Gazeta Wyborcza)

Specialists and managers want four-day work week but without cut in pay (Rzeczpospolita)

Medium-sized companies under the most pressure (Rzeczpospolita)

• PM Tusk's govt is set to win confidence in the vote scheduled for Wed., Jun 11
• Questions do still linger over timing of govt reshuffle
• Third Way's future might also be discussed

The junior ruling allies in the Third Way (TD), Polska 2050 and the Polish Peasants' Party (PSL), as well as the Left will back the confidence vote in PM Donald Tusk's that is scheduled to be held on Wed., Jun 11, according to recent declarations. There has been some consternation in the ruling camp since the loss by the senior ruling Civic Coalition (KO) candidate Rafal Trzaskowski in the Sun. election runoff against Law and Justice (PiS)-backed candidate Karol Nawrocki, but in light of lower polling levels -- which will only be hurt by the election loss -- the parties have little choice but to keep going for now.

There are some questions over a planned government reshuffle that is also lead to a big slimming down of the government, meaning there won't be as many ministerial positions. Reports in the press are that the reshuffle is to be ready by August, but Sejm Speaker and Polska 2050 leader Szymon Holownia says it should happen more quickly. PM Tusk has received quite a lot of the blame for Trzaskowski's loss, but his position is not in doubt. Deputy PM and PSL leader Wladyslaw Kosiniak-Kamysz said directly on Mon. that deep personnel changes were not needed.

The reshuffle is also to be accompanied by a new coalition deal. All sides seem to agree that the government must begin passing specific policies no matter if they will be vetoed by outgoing President Andrzej Duda or President-elect Karol Nawrocki, who takes over in early August. In fact, one of the main strategies of the ruling coalition is to be to get Nawrocki to veto as much as possible since it can then blame policy stagnation on the president and on PiS (Nawrocki's "independent" campaign was always a political fiction).

Holownia has slammed the government's previous communication policy, which was to rely on Tusk. But an overwhelmed Tusk, who has a big negative electorate, did not prove to be a consistent communicator, and that likely helped lead to Trzaskowski's loss since the impression was left of a government that had not achieved much, but the situation has in fact been complicated by a relatively short time in office, a heavy election calendar, and Duda's veto. Kosiniak-Kamysz also called for a better communication policy, but also a clear government strategy.

On the Third Way directly, Holownia has said his Polska 2050 and the PSL would hold talks in the coming weeks on whether to continue as a coalition. He said a decision on the matter had not yet been taken. Still, Holownia did say he believed that the ruling coalition would survive until the parliamentary elections due in autumn 2027.

Deputy head of the Left Krzysztof Gawkowski, a deputy PM and minister, said Tues. and Wed. that the Left would support the government in the confidence vote and noted that "the government is holding strong." He said Tusk would talk with government ministers about the reshuffle after the Jun 11 confidence vote.

Overall, there has been much speculation that the presidential election result would lead to the collapse of the ruling coalition, but, though the pressure is heightened, the simple fact is that an early parliamentary election would remove the ruling coalition from power and might even wipe out some of its constituents. Only the KO would be certain of security representation. But it doesn't make sense for elections to be held since there isn't much to run on. Because PiS gave up power so late after the October 2023 election, the current coalition has been in government for only about 17 months, during which three elections were held. All of this hurt policy progress. But another reason for the lack of progress was the reluctance to hammer out internal deals between parties with very disparate goals and voters only to have them vetoed by President Duda. That was a mistake since the impression was created of a do-nothing government rather than one hurt by circumstances and obstacles. One should thus expect the government to draft much clearer policy prescriptions and then to implement them. The feeling will be that if Duda or Nawrocki veto, then let them take the blame for the lack of progress. Whether that trick can be successful remains to be seen.

• Next MPC meeting: Jul 1-2, 2025
• Current policy rate: 5.25%
• EmergingMarketWatch forecast: 5.25%

Rationale: The Monetary Policy Council held interest rates at its policy sitting held on Jun 3-4 and then issued a cautious post-sitting statement that was noted mainly for returning a sentence that current rates are conducive to bringing inflation down to the target in the medium term. That statements suggests that the MPC does not see a pressing need for cuts. There are many uncertainties still delineated, from fiscal policy through wages, but there was also no sign that the council sees things optimistically. Though inflation is much lower than it expected at 4.1% y/y in May, it commented rather that inflation remains "elevated."

The latest MPC member comments have also been cautious, and that suggests there is now a greater chance the MPC holds rates at its Jul 1-2 sitting. A wait until the Sep 2-3 sitting (there's no policy sitting scheduled for August) would make sense if the MPC wants to see where inflation actually goes in July (that data will be flashed on Jul 31), if the MPC wants more insight on fiscal policy since the 2026 budget is likely to be out in August, and if the MPC wants more sign of where power prices are likely to go (power firms have until end-July to submit new tariff motions). Considering the next cut is likely to be a 25-bp move, there is probably not a lot of downside to waiting until September.

A cut in July cannot be ruled out, however. The inflation projection will be updated, and it is likely to show a lower trajectory, and perhaps a much lower one. The only cautionary note is that if the NBP takes a no-policy change position, the projection for Q4 could still reflect a rise in inflation (even if that won't actually occur) and that would give the MPC an excuse not to cut in July. The natural gas tariff will be slashed by 15% on Jul 1, and that will lead to much lower inflation from gas, perhaps helping the MPC take a dovish stance. There was no sign of this in the post-sitting statement.

The outlook for July in the end will depend on what NBP and MPC head Adam Glapinski says at his presser on Thurs. at 15:00 CET. If he continues to sound dovish, as he did in April and May, then perhaps there is still a good chance of a cut in July. However, it is beginning to look like the MPC will wait until September to touch rates against, particularly as the presidential election introduces new uncertainty.

Archived video of all MPC press conferences

MPC's post-sitting statements

Latest council minutes

Latest NBP inflation report (March 2025)

Most recent MPC voting results

• MPC adds back line that current rates are conducive to meeting CPI target in medium term
• MPC also says inflation is still elevated
• It is unclear how hawkish NBP's Glapinski will be in key Thurs. presser, but statements suggests coming caution

Poland's Monetary Policy Council held interest rates on Wed. in the expected decision, but then took a cautious tone in the post-sitting statement. After having dropped the sentence for its 50-bp rate cut in May, the MPC reintroduced its line that "the current level of NBP interest rates is conducive to meeting the NBP inflation target in the medium term." That line suggests that current policy will help bring inflation down to the target in the medium term, meaning further policy easing is not required.

The council also said that previous increases in administered energy prices together with continuously heightened annual growth in the prices of food and non-alcoholic beverages translated into what was still elevated CPI inflation. The council did note that inflation had slowed to 4.1% y/y in May from 4.3% in April, though it noted this was due in part to lower fuel prices. It acknowledged that core inflation likely fell in May as well.

Regarding future decisions, the council largely kept its paragraph unchanged from the May one, noting that further decisions would depend on inflation and economic growth prospects, developments in demand pressure, the situation on the labour market, the level of administered energy prices, and fiscal policy. External uncertainty also existed, it noted.

Overall, the post-sitting statement was in fact very brief and didn't give a huge amount of information. But we still think it betrayed a caution that would argue against a rate cut in July. If the council as a whole and seen more ground for further policy easing in July, we imagine there would be some sign of it in the statement. Still, NBP and MPC chair Adam Glapinski's comments at his presser set for 15:00 CET on Thurs. will be key. We think Glapinski will rather focus on cautious, fiscal threats, the wage rise in April, and guide the market to expect further easing after the MPC's August break. That said, inflation will slow sharply in July and that and a very dovish July inflation projection might still secure a slight cut in July.

• S&P says the probability of fiscal reforms is low

S&P Global Ratings warned in a comment on the Sun. presidential election runoff won by the Law and Justice (PiS)-backed Karol Nawrocki that it might lead to political gridlock that will make policymaking more unpredictable, according to comments cited by Polish media. The election result meant that the Civic Coalition (KO)-led government would be challenged to implement its agenda. This would especially impact any potential fiscal consolidation, the probability of which S&P said was low. The agency forecast that the general government deficit would fall to 5.1% of GDP in 2026 from the planned 6.3% in 2025, and then fall to 3.9% by 2028. Still, it did note risks to fiscal consolidation appetite. S&P added that the election result meant it would be difficult to reverse some of the controversial judicial reforms carried out by the PiS-led governments of 2015-23.

Still, S&P said the remarkable resilience of the Polish economy to shocks continued to underpin its ratings. This resilience reflected a diversified economy, flexible labor and product markets, an educated workforce, and access to significant external sources of financing, including transfers from the EU.

S&P forecast average inflation at 3.9% in 2025. That would help the MPC lower the key rate to 4.75% at end-2025, though it might go even lower. It saw the key rate at 3.5% in 2026.

Overall, Nawrocki's win in the runoff is negative for the government's ability to make policy, but it does rather extend the status quo. One other aspect is because of PiS foot-dragging after the Oct 15, 2023, election, the KO-led government didn't in fact take over until very late in 2023. This means it has actually been in power for only about 17 months, and in these 17 months there were three key elections: local government ones, European Parliament ones, and the presidential election just held. It would be hard to imagine any government implementing massive reforms during this period, especially considering President Andrzej Duda would veto anything PiS opposes. But the government has done a very bad job communicating all of this and instead of the impression its policies were frustrated by an opposition president or hurt by the heavy election calendar, the impression is the government has done nothing. This is a mood helped by intra-coalition tensions, which does suggest a new coalition deal that focuses on specific policies and a better communication strategy could help the government going forward.

Nawrocki is independent in name only and he should be expected to try to frustrate the government and help PiS's path to the next election. PiS doesn't in fact have massive incentive to want elections now since its support is down and the far right Konfederacja's is up, meaning elections would lead to a potentially fractious coalition of PiS and Konfederacja. PiS's goal will rather be to boost its result, hurt the coalition allies, hurt Konfederacja, and try to win alone in 2027 (or whenever the next election is held). The three main rating agencies are thus all right that this gridlock will frustrate policy and make it more likely high debt and deficits continue. But even if a strong PiS-Konfederacja government takes over, Polish society will remain very polarised and we fear fiscal consolidation on a big level will only happen if there is a near crisis.

• Moody's says lack of judicial reforms could bring problems with EU fund flows

Moody's Ratings said that the presidential election result that saw the Law and Justice (PiS)-backed Karol Nawrocki defeat the senior ruling Civic Coalition's (KO) candidate would limit the ruling coalition's ability to govern effectively and implement judicial reforms, according to a statement. Moody's said that Nawrocki's victory meant the existing stand-off between the KO-led government and the president, who is now the PiS-backed Andrzej Duda, would continue, making it difficult for the government to govern effectively and implement judicial reforms. As a result, Poland's A2/stable rating is likely to face a continued period of institutional gridlock, it said.

Moody's noted that the European Commission's (EC) decision to unblock Recovery and Resilience Facility (RRF) funds in early 2024 was based on the reforms adopted by Poland and good faith efforts, but it remained contingent on the full implementation of agreed reforms., Cohesion Funds could also be suspended if the rule-of-law "horizontal enabling condition" is assessed as not met, it said.

The presidential election result could also delay planned fiscal consolidation as the ruling KO-led coalition seeks to use fiscal measures to maintain or boost public support. That spending would come even though there is a significant uptick in defence spending and increasing spending pressures on health and social programmes.

Overall, the judicial reforms planned by the government are as good as dead as Nawrocki will block all of them. That will put the onus on the EC on whether to punish Poland or not. We have a feeling the EC will not punish Poland since the government cannot pass the bills, but if a PiS-Konfederacja government were to take power and not have the excuse of a difficult cohabitation -- and especially since it would likely be euro-sceptic at the latest and anti-EU at the most -- we imagine regular EU funds could be at risk. One thing to think about is that if, let's say, Tusk got the EC to risk blocking EU funds if judicial reforms weren't passed, perhaps Nawrocki might be persuaded to come to some sort of deal. This does look like a low probability due to that massive animosity between the KO and PiS, but might be something to think about.

One final note is that Nawrocki was nominally "independent," but was handpicked to run by PiS leader Jaroslaw Kaczynski and is 100% a PiS candidate. But now that he is president, it does remain unclear how independent he will be. Kaczynski can't remove him anymore. Still, Nawrocki has no independent power base, his entire career is based on PiS appointments, and so it is still likely he will carry out PiS's political will as president.

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

Poland's Monetary Policy Council decided Wed. to hold its official interest rates, matching the consensus expectation, according to a statement. The MPC will publish its post-sitting statement at 16:00 CET. The decision did come out relatively late, suggesting a potentially lively discussion. The council did suggest it was going to discuss the reserve requirement for banks in June and it is possible the interest rate on reserves was cut. NBP and MPC head Adam Glapinski will give his monthly press conference on Thurs. at 15:00 CET in what will be key remarks for the rate outlook.

Data Download

Overall, the MPC's stance is somewhat unclear. The latest data has been better and, with the power price outlook still formally unclear, many MPC members had begun talking about rate cuts after the August break, that is, in September (when the power decisions are likely to be made) or in October. But then came the 15% cut in the natural gas tariff to come on Jul 1, and which will help cut inflation by more than expected. The power capacity fee is still expected to go into effect in July, but that will only limit the disinflation, which could push inflation even to within the target band. That is likely to keep the door open to a 25-bp cut at the July sitting, when the inflation projection is also updated. However, the election result has led to some zloty weakness due to rising political risk that will darken the fiscal outlook and it is unclear how the MPC will view the situation. This will make Glapinski's presser even more critical than usual.

• Fitch says election result could worsen institutional battles

Fitch Ratings said Wed. that Law and Justice (PiS)-backed candidate Karol Nawrocki's victory in the Sun. presidential election runoff will likely pose continued challenges for the government's economic reforms and potential fiscal consolidation and might exacerbate institutional clashes, according to a statement. The rating agency said that Nawrocki's win makes it likely the presidency will continue to challenge the implementation of coalition policy via his veto, which will be a continuation of the status quo as the outgoing President Andrzej Duda has likewise blocked government progress.

Fitch said the ruling coalition will be tested by the result and faces a confidence vote called by PM Donald Tusk for Jun 11. The agency said though it expects the government to remain in power, political goals are expected to be more of a factor ahead of the next parliamentary elections due by October-November 2027. "This could reduce the room to implement politically challenging measures, including those supporting fiscal consolidation," it said.

Fitch said it will continue to closely monitor the prospects for fiscal policy and reform implementation, as these factors will be pivotal in determining the health of Poland's public finances. Weakened confidence in the government's capacity to deliver fiscal consolidation consistent with stabilising debt at a level closer to peers over the medium term is a negative sensitivity for Poland's A-/stable rating. Fitch currently forecasts general government debt rising to 61.6% of GDP in 2026, which it noted is above the projected 57.2% A category median. Worse, stabilisation was expected at around 64% of GDP in 2028.

Overall, Fitch's comment suggests there could eventually be some rating downside, which would probably be triggered first by an outlook downgrade and only later by an actual rating move. We believed the government was not going to be ambitious with its fiscal consolidation before the presidential election result, but the actual result means the government is likely to keep any consolidation to a minimum. The question arises too whether a President Nawrocki would allow any consolidation, in part as he pledged to defend social spending and not to allow any tax increases. Nawrocki is likely to wield the veto broadly as he works for PiS -- the supposed detachment from PiS was always a political fiction -- and tries to cripple the government ahead of the next general election. The governing coalition has no choice but to make the best of things, but if it can show Nawrocki is the one blocking its agenda, it might be able to salvage the situation. But political risk is likely to remain elevated and the threat of early elections is likely to continue all the way through to the scheduled end of the term.

• Registration rise quickens from 5.8% y/y in April, total is 2nd highest for a May
• Registrations slip 1.1% m/m to 51,932 units in May from 52,504 units in Apr
• In Jan-May, registrations rise 3.9% y/y to 262,823 units
• Samar holds its forecast for 2025 at 2.3% rise to 632,500 units total

Polish passenger car and light commercial vehicle (LCV) registrations rose 7.2% y/y in May, accelerating from the 5.8% rise posted in April, though the 51,932-unit total was the second highest for a May, according to data published Wed. by the car-market monitoring company Samar. Car registrations were pulled forward in late 2024 as buyers tried to get ahead of the stricter CAFE emission regulations that went into effect on Jan 1 and that were feared to lead to price increases, but they have still performed well this year. The May car total did, however, fall 1.1% m/m from 52,504 units in April. In Jan-May, registrations rose 3.9% y/y to 262,823 units.

Data Download

Samar commented that the number of registrations rose in y/y terms for the third month in a row, with May the best for the month since 2019. Samar added that the month was record-breaking in terms of the share of Chinese manufacturers in the car market, which amounted to 7.1% (the Jan-May share is 5.8%). The share of new electric passenger cars was also record breaking at 6% in May, Samar added.

Samar held its forecast for the year at a 2.3% rise to 632,500 units. This is to see 565,000 passenger car registrations and 67,500 LCV ones.

In the May breakdown, passenger car registrations rose 6.8% y/y to 46,634 units, which marked a 0.7% m/m decrease. In Jan-May, such registrations rose 4.0% y/y to 235,699 units. LCV registrations rose 10.8% y/y to 5,298 units in May in a total that marked a 4.3% m/m decline. In Jan-May, LCV registrations rose 3.7% y/y to 27,124.

Overall, vehicle registration growth continues to be surprisingly strong with record or near record levels of registrations. This likely reflects strong demand from companies, but also the rising share of EVs and especially Chinese ones, which are more affordable than other ones. The strong passenger car registration totals are helping to boost retail sales.

• Suspensions span prominent Istanbul and Adana districts over alleged financial crimes and organised crime links
• Government appoints trustees for officials removed under separate terrorism probes

The interior ministry announced the suspension of several mayors from the Republican People's Party (CHP) following extensive operations targeting alleged financial crimes and criminal organisations, the local media reported. The removals affected three Istanbul districts - Avcilar, Buyukcekmece, and Gaziosmanpasa, as well as the Seyhan and Ceyhan districts in Adana province, the media said. The enforcement actions stemmed from the fifth wave of investigations, including allegations of financial crimes connected to the Istanbul metropolitan municipality (IMM).

The latest removals increased the total number of suspended CHP mayors to eleven. The affected officials included IMM mayor Ekrem Imamoglu, along with district mayors Utku Caner Caykara of Avcilar, Riza Akpolat of Besiktas, Alaattin Koseler of Beykoz, Mehmet Murat Calik of Beylikduzu, Hasan Akgun of Buyukcekmece, Hakan Bahcetepe of Gaziosmanpasa, Oya Tekin of Seyhan, and Kadir Aydar of Ceyhan. In a separate development related to terrorism investigations, Esenyurt mayor Ahmet Ozer and Sisli mayor Resul Emrah Sahan were removed from office and replaced with government-appointed trustees.

• CHP leader Ozgur Ozel faces investigation for strong rally statements
• Investigation follows arrests of five CHP mayors in Istanbul corruption probe

The Istanbul chief public prosecutor's office initiated a judicial investigation against opposition CHP leader Ozgür Ozel on charges of threatening a judicial officer to obstruct their duties and publicly insulting a public official, the local media reported. The inquiry followed remarks made by Ozel during a recent rally, targeting Istanbul chief prosecutor Akın Gurlek amidst tensions over ongoing probes into opposition municipalities. Addressing Gurlek, Ozel used strong language, indicating that the prosecutor had encountered staunch resistance and that patience was wearing thin. Ozel further warned that while they had been conducting their protests peacefully, further provocation could lead to gatherings that would not disperse.

This legal development closely aligns with the apprehension and detention of 22 individuals, including mayors and officials from five municipalities linked to the CHP and aligned with the Istanbul Metropolitan Municipality (IMM) investigation. These arrests were part of the fifth wave of an ongoing investigation centring on alleged misconduct within the IMM framework. In the fifth wave of investigations focused on the IMM, 22 out of 38 detained individuals were arrested. Among those arrested were five district mayors: Hasan Akgul of Buyukcekmece, Hakan Bahcetepe of Gaziosmanpasa, Utku Caner Caykara of Avcilar, along with Kadir Aydar of Adana's Ceyhan and Oya Tekin of Adana's Seyhan.

• Trend indicators and three-month averages show gradual inflation deceleration continues
• Food prices drop, services inflation slows except rent
• Exchange rate pressures on durables ease

Consumer prices increased by 1.5% m/m in May, while annual inflation decreased by 2.5pps to reach 35.4%, the CBT said in its monthly price developments report. All primary trend indicators fell compared to the previous month, the CBT stated, adding further that three-month moving averages confirmed the continued, gradual deceleration of the main trends throughout the period.

The annual inflation rate declined across all major categories, with the exception of core goods where the decrease remained limited, the CBT highlighted. Notable developments on a m/m basis included declining food prices and a deceleration in service price increases, according to the CBT. The food group experienced a price decline in May, driven primarily by the unprocessed food sub-category, while processed food price increases weakened considerably, it noted. Despite the continued unfavourable outlook in fruit prices, unprocessed food prices decreased, led by vegetables and various other unprocessed food items, the CBT emphasised. The energy group's monthly inflation was significantly influenced by increases in network water prices, alongside the residual effects of regulatory adjustments made to residential electricity tariffs in April, it underlined.

Exchange rate developments continued to exert influence on core goods prices, particularly in durable consumer goods, although this impact showed signs of weakening, the report noted. The services sector demonstrated a slowdown in monthly price increases, with this moderation observed across all sub-categories except rent, it said.

Monthly producer prices exhibited relatively strong growth led by the energy sector, resulting in annual producer inflation rising by 0.6pps to 23.1%, it indicated.

CHP Chairman Ozgur Ozel visits IMM mayor Ekrem Imamoglu in prison (Hurriyet)

Businessman Aziz İhsan Aktas, arrested in IMM investigations, is released (Hurriyet)

Defence minister Yasar Guler: Turkey provides military training to Syria (Hurriyet)

7-day strike in Izmir metropolitan municipality ends (Sozcu)

Call from YRP's Bekin to government: Grain producers must not be left alone (Sozcu)

40mn passengers fly in Istanbul airports in Jan-Apr (Sozcu)

Industry minister Mehmet Fatih Kacir: Our initiatives are moving to global stage (Sabah)

Competition Board launches investigation into seed market (Sabah)

Ankara-Damascus flights begin: First flight on June 17 (Sabah)

President Erdogan receives Saadet Party chairman Arikan (Sabah)

• CBT monetary tightening raises asset quality and profitability challenges
• Net interest margins improve late 2025 with potential rate cuts
• External funding access steady despite slowed Eurobond issuance

Turkish banks faced heightened challenges due to monetary tightening by the central bank aimed to tackle financial market volatility, Fitch Ratings stated. Elevated lira interest rates exacerbated the deterioration of asset quality and delayed net interest margin (NIM) recovery, as liabilities re-priced faster than assets, it said. However, a modest NIM upturn was anticipated later in 2025 with the expected policy rate cuts, although less pronounced than earlier forecasts, it added. Elevated costs and inflationary pressure on operations remained key risks, with regulatory caps further constraining profitability, Fitch noted.

Asset quality suffered in early 2025, marked by an uptick in impaired loan ratios across retail loans, credit cards, and SME loans, with significant increases compared to the previous year, it indicated. Elevated policy rates and subdued GDP growth intensified pressures, with loan re-pricing slower than anticipated, affecting overall earnings stability, Fitch highlighted. Despite these difficulties, Fitch maintained a neutral outlook for Turkish banks, noting that profitability in 2025 could still outpace the strong performance seen in 2024, thanks to ample provisioning and capital buffers.

Refinancing risks appeared contained despite earlier market volatility, though potential instability could undermine investor and depositor confidence, given the banks' notable reliance on short-term external debt, Fitch underlined. External funding access and Eurobond issuance slowed, but Fitch regarded these pressures as manageable unless macroeconomic policy shifts or further volatility materialised. Gradual policy rate easing in late 2025 was expected to catalyse measured recovery, albeit contingent upon broader economic stabilisation, it emphasised.

• Next MPC meeting: Jun 19, 2025
• Current policy rate: 46.0%
• EmergingMarketWatch forecast: Hold
• Rationale: CBT to hold rates amid FX pressure, eyeing cautious easing if market conditions allow

We anticipate the CBT to maintain its policy rate at 46.0% during the upcoming June meeting. This expectation is primarily influenced by our assessment of the CBT's immediate priority to address the significant erosion of FX reserves. Market intelligence suggests reserve losses surpassed an estimated USD 57bn in the wake of political developments following IMM mayor Ekrem Imamoglu's detention, compelling the CBT to implement various remedial measures. While these interventions have yielded moderate recovery, reserves remain considerably below their pre-event levels.

Data Download

Our forecast for a steady 46.0% policy rate is further corroborated by the CBT's ongoing provision of liquidity, aka the weighted average cost of funding (AOFM), to the markets at rates approaching the 49% overnight lending threshold. This rate, a notable 300bps above the already elevated policy rate, signifies, in our view, acute market stress. Consequently, prevailing market funding conditions already imply a more stringent monetary stance than the official policy rate indicates. A deviation from the 46.0% benchmark is therefore improbable in the near term, as the CBT contends with underlying systemic vulnerabilities and endeavours to rebuild credibility.

In this context, the paramount objective currently is the uninterrupted continuation of the reverse dollarisation process and the sustained real appreciation of lira. Thus, we believe that the initial policy adjustment will not be an interest rate reduction in response to positive surprise in May's inflation data. Instead, we anticipate a loosening of the average cost of funding towards its lower band. Should the AOFM approach this lower band without triggering undue demand for foreign currency in the market, the CBT would likely gain the confidence to consider interest rate reductions, potentially initiating a new easing cycle at the subsequent meeting in July. Therefore, we expect a gradual easing of the average cost funding in June, and, contingent upon stable FX demand, the commencement of a prudent interest rate reduction process at the July MPC meeting. Such a decision would, in our opinion, also provide some cushion to the CBT as the court postpones CHP's congress verdict to Jun 30, so the central bank can navigate monetary policy adjustments without the immediate overhang of potential political turbulence, thereby allowing for a more measured approach to policy normalisation while maintaining sufficient flexibility to respond to any market volatility that may emerge from the eventual judicial outcome.

Having said that, there is currently a very high real interest rate, both ex-ante and ex-post, and coupled with the prolongation of the lira's real appreciation process, this duo has begun to squeeze exporters and industrialists, we note. Hence, it presents a challenge to the sustained dynamism of export-oriented sectors and overall industrial productivity, warranting thorough consideration of policy adjustments aimed at mitigating these pressures without jeopardising overarching macroeconomic stability goals, we assess.

Summary of April rate-setting meeting

MPC rate decision in April

Quarterly Inflation Report for Q2

Monetary policy strategy for 2025

• Core inflation metrics exceed headline CPI, signalling persistent underlying pressures
• Services prices drive inflation rising by 2.6% m/m in May, led by rents
• Goods inflation moderates to 1.7% m/m, below headline inflation rate

The seasonally-adjusted CPI inflation recorded an m/m rise of 2.0% in May, according to Turkstat data. This figure closely aligns with our projection of 2.2% m/m, which was derived using the Tramo-Seats methodology with a direct approach. It is pertinent to note that Turkstat employs an indirect methodology. The seasonally-adjusted inflation for May surpassed the unadjusted rate of 1.5% m/m. The Core B index ascended by 2.1% and the Core C index was up by 2.3% m/m. Both metrics remained above the aggregate seasonally-adjusted CPI, meaning that underlying inflationary pressures, excluding volatile items like food and energy, were still robust and contributing significantly to the overall inflation dynamic, potentially indicating persistent inflation. Furthermore, the annualised values for the Core B and Core C indices stood at 28.3% and 31.4% respectively, both of which exceed the CBT's official mid-point targets, we note.

Data Download

The principal driver of the May inflation figures was services inflation, which stood at 2.6% m/m. This predominantly stemmed from hikes in rent and transportation prices, which increased by 4.0% m/m and 3.7% m/m, respectively. The general deceleration observed in the headline inflation figures has not yet permeated these categories, and a substantial easing is not anticipated in the immediate future, in our view. Inflation in other services also surpassed the headline rate, at 2.9% m/m. Conversely, inflation within the hotels, cafes, and restaurants sub-sector demonstrated a more tempered increase relative to the broader services category.

Goods inflation stood at 1.7% m/m, a rate lower than the headline inflation. Among its constituent sub-items, energy inflation rose by 2.2% m/m, while inflation for food and non-alcoholic beverages increased by 1.6% m/m. The latter category exhibited a 0.7% m/m contraction in unadjusted terms, so we think that seasonal factors likely exerted a temporary downward influence on the prices of food and non-alcoholic beverages, masking the underlying inflationary trend observed in the seasonally-adjusted data. While core goods inflation advanced by 1.9% m/m, gold prices saw a 2.7% m/m increase, both exceeding the broader goods inflation category.

• CPI-based REER continues four-month depreciating streak, but remains above last year's levels
• D-PPI based REER shows slight m/m decline, stays slightly below 2024 average
• Tourism provides FX support, while political turmoil threatens market stability in near term, in our opinion

The CPI-based REER extended its depreciation momentum in May, exhibiting a 1.5% m/m deterioration subsequent to an upward-adjusted 2.0% m/m devaluation in the preceding month, thus marking its fourth sequential monthly weakening, according to CBT data. Notwithstanding this trend, we observe the CPI-based REER remained elevated relative to the prior year's mean. The current month's deterioration, in our evaluation, embodied residual ramifications from political volatility precipitated by the apprehension of IMM mayor Ekrem Imamoglu. In y/y terms, the CPI-based REER manifested substantial appreciation of 7.2%, attributable to persistent inflation disparities vis-à-vis key trading counterparts, particularly given Turkey's measured disinflationary progress in May, in our assessment. The D-PPI based REER experienced marginal erosion of 0.4% m/m in May, situating it fractionally beneath its 2024 mean. On an annualised basis, this metric reflected a minor depreciation of 1.6% y/y.

Data Download

Looking ahead, near-term positive influences are anticipated from the tourism sector, as the upcoming season is expected to generate increased FX inflows. Conversely, escalating political tensions present a significant headwind. The scope of operations concerning the Istanbul municipality is broadening. Furthermore, a court decision regarding the Republican People's Party (CHP) congress has been deferred to Jun 30. Any adverse outcomes, such as the appointment of a trustee or the reinstatement of former leader Kemal Kilicdaroglu, the latter of which we deem highly probable, could precipitate political turmoil in the markets. Such developments carry the potential for headwinds to the real exchange rate that at a minimum counteract or even supersede the positive tailwinds, we assess.

Major setback for the government: Lower House passes pension hike and threatens to reject Milei's possible veto (Clarin)

Milei reacts to pension hike approval: "We will veto anything that jeopardizes our zero deficit goal" (Clarin)

Crowds march to Congress for pensions, the Garrahan Hospital, and to protest femicide (Clarin)

Highways case: Supreme Court swiftly rejects Cristina Kirchner's motion to recuse [Supreme Court Judge] Lorenzetti (Clarin)

Auto production rises 25% in May, driven by domestic market demand (Clarin)

City of Buenos Aires pays USD 330mn debt maturity (Clarin)

Economists see May inflation under 2% m/m (Clarin)

• Kirchner would gain immunity if elected in Sep 7 local election
• Supreme Court could ratify her jail sentence and public office ban before then
• Kirchner going to jail would stoke support for Kirchnerism, would be a net negative for Argentina's 2025-29 prospects

The Supreme Court is already studying the "Highways" corruption case for which two-time ex-President Cristina Kirchner was awarded a six-year prison sentence and a public office ban, and could ratify the judgment before Kirchner has a chance to gain immunity in the next elections, the daily Clarin reported.

The sentence was given by a federal court late in 2022, ratified by an appeals court late in 2024, and execution of the punishment now awaits for the Supreme Court to deal with what should be the final round of appeals. It was always assumed that the court would not rule before the 2025 midterms because it is a politicized institution that has historically avoided rulings with electoral impact. However, Clarin reported that the court is already reviewing the case, and that one of its three members submitted an internal memo to convince the others of dismissing one of Kirchner's delaying tactics.

This possibility of an earlier-than-expected ruling is probably what motivated Kirchner to announce she is running in a local Buenos Aires election that is scheduled for Sep 7, a month and a half before the midterm election for the national Congress. Kirchner would be elected deputy to the provincial Congress in that Sep 7 election, and Buenos Aires deputies have jail immunity, even those elected for the local legislature.

Legal experts quoted by Clarin said an early ruling by the court could lead to an unprecedented situation where it would not be clear whether Kirchner can participate in the election or eventually take office. For example, nominations for the local election get settled on July 19, and some experts say Kirchner would be safe by then, while others claim a Supreme Court ratification before Kirchner takes office can still take her to jail.

Overall, Kirchner's jailing and public office ban becoming effective would be a big political development, and we are inclined to believe it would be negative for Argentina's prospects. Kirchner is still viewed very favorably by about 20%-30% of the population, and they will buy her argument that she is a victim of an corrupt justice system that is persecuting her. For this 20%-30% of the population democracy would be damaged, which could trigger stronger support for Kirchnerism and violent protests. The Milei administration is doing a good job in trying to defeat Kirchnerism for good, by governing well so they can beat them in elections, and cutting off the corruption pockets the Kirchnerists use to finance their clientelist practices. Sending Kirchner to jail and banning her from public office would be a shortcut likely to backfire, and it wouldn't be surprising if the government tries to use whatever influence it has to convince the Supreme Court to postpone its ruling until Kirchner gains immunity.

Treasury raises USD 2.75bn in bonds on international market in issue that highlights strong demand (Terra)

Credit in Brazil shows signs of slowdown in Q1, says [Financial Stability Committee] Comef minutes (CNN Brasil)

Lula doesn't keep promises and isn't well-intentioned, says poll (Veja)

Automatic Pix [the electronic payment system managed by the BCB] avoids problems with credit card cloning, says Galípolo (Poder360)

50% tariff on steel: Alckmin defends deepening dialog with US (O Globo)

Avian flu: 'The outbreak has been contained,' says agriculture minister about case in Montenegro (G1)

Lula travels to France to discuss climate change and receive doctor's degree (Gazeta do Povo)

• Alckmin says import tariff increase is bad for all, not only Brazil
• Brazil is expected to focus on establishing import quotas with lower tariffs

Vice President and Industry Minister Geraldo Alckmin said Wed. that Brazil should deepen its talks with the United States following the Trump administration's decision to raise import tariffs on steel and aluminum to 50%. Alckmin argued that the tariff hike is harmful to all countries, not just Brazil, and stressed that the government will reinforce during talks with the US that Brazil does not pose a problem to the American market. Alckmin also highlighted the importance of the Brazil-US steel value chain, noting that Brazil imports US metallurgical coal to produce semi-finished steel, which is then exported to the US for final goods manufacturing.

Overall, Brazil does not expect to reverse the 10% tariff now applied across the board to its products, viewing them as the new baseline for US trade policy, as reported by government sources to CNN Brasil. This expectation stems from the recent US-UK trade agreement, which maintained the same 10% tariff on British steel exports, despite the strong historical alliance between the two countries. In light of this, Brazil is expected to shift its focus toward negotiating the return of import quotas with lower tariffs, especially for steel and aluminum. These discussions are being conducted with the US Trade Representative (USTR) through a working group established with Brazil's Foreign Ministry (Itamaraty) and the Ministry of Development, Industry, Trade, and Services (MDIC).

• PMI remains below neutral mark for second consecutive month
• Lower demand drives service activity contraction
• New orders fall for second consecutive month, but expectations improve

The S&P Global Services Business Activity Index for Brazil rose by 0.7pt m/m to 49.6pts in May from 48.9pts in April, following a 3.6-pt decline the month before and remaining below the neutral mark for the second consecutive month, according to data released Wed. by the S&P. S&P attributed the decline to lower demand and a drop in new orders, the latter falling for the second consecutive month. This decline also slowed employment growth, which grew at its slowest pace in six months, although it still rose for the seven consecutive month.

Data Download

Input costs rose at their slowest pace since November 2024 and services final prices grew at their slowest pace in a year, S&P said. Although inflation eased, it remained elevated, and input costs were transmitted to clients. Companies noted higher prices on food, fuel, material, rent, and stationery. Slowing inflation contributed to an improvement in expectations for the coming year. Companies noted that economic stability, greater investment, a growing client base, and a potential recovery in demand could support higher output over the next 12 months.

Overall, the Services PMI remained below the neutral mark, indicating a continued contraction in services' activity and reinforcing the BCB's view that an economic deceleration is underway as monetary tightening takes effect. It's worth noting that services inflation has been easing, which could support the Copom's decision to halt the tightening cycle with the Selic rate at 14.75% at its June policy meeting. The Copom has highlighted services inflation as one of the key upside risks, as it remains above the level compatible with keeping inflation within the +/- 1.5-pp fluctuation band, according to its latest minutes.

• Treasury to issue a new 5-year benchmark and reopen current 10-year benchmark
• Operation is scheduled for Wed.

The Brazilian National Treasury announced Wed. it mandated a new issuance of dollar-denominated bonds on the international market, according a statement. The operation will include the issuance of a new 5-year benchmark bond maturing in 2030 and a reopening of the current 10-year benchmark bond under the Global 2035 program. The transaction will take place on Wed., with results expected by the end of the day.

Overall, this marks the second international bond issuance by the government in 2025, following a USD 2.5bn 10-year bond issuance in February. The Treasury stated that the main goals of the new issuance are to enhance the liquidity of Brazil's sovereign yield curve and pre-fund upcoming foreign-currency debt maturities.

• Sales bounce back from 5.5% y/y decline in Apr
• Sales rise 8.2% m/m in May in fourth consecutive increase
• Fenabrave says high Selic rate and IOF increase could harm sales in the coming months

Total automotive sales, excluding motorcycles, grew by 16.2% y/y to 225,685 units in May, bouncing back from a 5.5% decline in April that was caused by calendar effects, according to data released Tues. by the National Automotive Vehicle Distribution Federation (Fenabrave). Fenabrave noted that the increase happened despite one fewer working day in May compared to the previous year, signaling good momentum for the sector. On a monthly basis, sales rose 8.2% m/m in May, slowing from 6.7% in April but marking the fourth consecutive increase. In Jan-May, total sales rose 6.1% y/y to 985,948.

Data Download

Passenger cars, which accounted for 74.2% of all May sales (up from 73.0% in April), grew by 16.3% y/y, reversing the 7.3% decline seen the previous month. Light commercial vehicle (LCVs) sales grew by 19.5% y/y in May, marking the fourteenth consecutive increase, and bus sales saw a sharp 51.3% rise, extending the growth streak here to twelve months. Trucks, in turn, were the only category to record a decline in May, falling by 5.1% y/y to mark the third consecutive drop.

Overall, total auto sales improved in May compared to the previous year and despite the calendar-related limitation, underscoring strong demand in the sector. Looking ahead, however, Fenabrave cautioned that the high Selic rate -- currently at 14.75%, its highest level since 2006 -- and the recent IOF increase could limit credit availability for automotive purchases in the coming months, negatively impacting the sector.

• Lula disapproval rating rises to 57% from 56% in Mar
• Some 56% say Lula's administration is worse than his previous ones
• Some 48% say the economy worsened in the past 12 months, down from 56% in Mar
• Some 50% say the government was wrong to increase the IOF tax to individuals

President Lula da Silva's job approval rating fell by 1pp to 40% in June from 41% in March, according to a May 29-June 1 survey conducted by Quaest and released Wed. (with +/- 2% margin of error). Lula's disapproval rating rose to 57% from 56% before, while those who did not know or did not answer remained unchanged at 3%. In the breakdown, 28% view Lula's administration as "regular," down from 29% in March, while 26% consider it "positive," down from 27%. Meanwhile, those rating the administration as "bad" rose to 43% from 41%. Additionally, 56% of respondents believe this Lula administration is worse than his previous ones, and 44% think his current term is worse than that of former President Jair Bolsonaro, compared with 40% who see it as better.

Data Download

Regarding the economy, some 48% said it has worsened in the past year, down from 56% in March. Those who believe it improved rose to 18% from 16% before, while those who did not see any change rose to 30% from 26%. On food prices, some 79% said they rose in the past month, down from 88% in March, marking the first decline after three consecutive increases in this perception. Meanwhile, some 12% said food prices remained unchanged and 7% that they fell. Looking ahead, 45% said the economy will improve in the next year, 30% expected it to worsen, and 21% saw no change coming. When asked about the IOF, only 39% of respondents said they had heard about the issue, while 50% said the government was wrong to increase it for individuals.

Overall, Lula's disapproval rating slightly increased, but that can be considered a steady result, which is not bad in light of the recent INSS fraud scheme. Some 31% of respondents said Lula's government was responsible for the fraud, while 26% did not know or did not answer, indicating that public opinion on the matter remains diffuse and the political right may not have gained as much from it as expected. The key concern going forward is how the government will respond to a slowing economy, which typically impacts approval ratings, especially with the 2026 elections approaching. We believe the income tax reform will be the government's flagship policy to bolster Lula's potential reelection bid next year, though Lula has linked his decision to run again to his health. Other social programs, such as the Vale Gás (still under discussion to ensure budgetary compliance) and the electricity bill social fare, will also play a critical roles while the government is pressured to find fiscal balance.

• MPC meeting: Jun 17-18, 2025
• Current policy rate: 14.75%
• EmergingMarketWatch forecast: Hold

BCB Governor Gabriel Galípolo said Jun 2 that the Copom is still discussing the Selic tightening cycle, noting that the country's monetary environment will remain at a restrictive level for a prolonged period. Galípolo added that the existing global and domestic uncertainties necessitate flexibility and caution on the BCB's part, justifying the lack of guidance from the Copom in the latest minutes. Galípolo also noted that the Brazilian economic resilience is surprising given the level of the Selic rate but added that the monetary tightening will take effect despite lags.

Brazil's Q1 2025 GDP grew by 2.9% y/y, slowing from 3.6% in the previous quarter, and by 1.4% q/q, driven by a greater agriculture output after a challenging 2024. Industries and services also showed a slowdown in yearly terms, with industry showing a slight decline on a quarterly basis. On the demand side, private consumption slowed compared to the previous year, but accelerated from the previous quarter, supported by a robust labor market, real wage gains, and credit access. Although economic activity came in strong, we believe there are signs of deceleration that should support the Copom's decision to hold the Selic at 14.75% in its June policy meeting. The BCB expects the effects of monetary policy to deepen in the coming quarters, potentially signaled by the first yearly decline in industrial output in April after ten consecutive increases, and the government forecasts flat q/q growth in Q2.

On the fiscal side, the IOF measures, which we believe will help the Copom halt the tightening cycle despite Galípolo's criticism of the tax being used as a revenue-raising tool, have sparked renewed debate of structural reforms. The government is closely coordinating with congressional leadership to prevent a repeat of the dilution of its late 2024 fiscal package. Finance Minister Fernando Haddad said that alternatives to the IOF hike will be presented next week, following a meeting with the congressional college of leaders on Sunday. We believe the upcoming fiscal package, which are to include a constitutional amendment and a broad bill, could help re-anchor inflation expectations if it includes medium- and long-term expenditure reforms. While we expect the government to focus mainly on reviewing tax benefits and not on more politically sensitive topics like the indexation of social benefits to the minimum wage or constitutionally mandated spending on health and education, measures such as reducing the government's contribution to the educational fund (as reported by Valor Econômico) could ease pressure on mandatory expenditures over the medium term.

Overall, the Copom has raised the Selic to 14.75% from 10.50% in September 2024 as inflation accelerated and breached the target range. Another breach is expected in June, as the 12-month cumulative IPCA remains above the 4.50% upper limit of the +/- 1.50-pp fluctuation band, which will prompt another explanatory letter from Galípolo to FinMin Haddad. We believe both economic activity and inflation have started to reflect the impact of monetary tightening, likely supporting the BCB's decision to pause the cycle with the Selic at 14.75%. Lower external demand and the IOF measures should also contribute to this decision. In our view, the renewed fiscal discussions open an opportunity for the government to assist the BCB in re-anchoring inflation expectations, but it remains unclear whether the government will seize what could be the last favorable political window to implement expenditure reforms before the 2026 elections.

• Notes some inflationary factors are transitory, including a seasonal effect and the avian flu's impact on the price of chicken
• Says negative pressure on prices is likely from the economy's slowdown
• Says bank is looking at the economy's deceleration because of its impact on prices, not targeting stronger performance at its policymaking

CB Deputy Governor Galia Borja said the factors pressing CPI inflation up recently will be fading in the short-term, as quoted by local daily El Economista on Wednesday. She noted some of the factors are clearly transitory, listing the avian flu's impact on the price of chicken and a seasonal effect on touristic services. The latter explains part of the pressure shown by services prices, the deputy governor said, echoing comments by Deputy Governor Omar Mejía, who had minimized the recent acceleration of core CPI inflation.

While these transitory factors fade, a slowing economy should pressure CPI inflation down, Deputy Governor Borja said. On this, she explained that the CB is not focused on GDP growth because it considers a dual mandate but because of its impact on prices. Indeed, the expectation of a looser output gap that comes with weaker pressure on inflation seems generalized on the CB, in our view.

Overall, Deputy Governor Borja took a dovish position in this interview, in our view. This suggests she might be willing to tolerate the recent inflationary pressure in coming sittings. However, it remains to be seen if she will favor rate cuts in all 2025 sittings if CPI inflation continues to disappoint or if mid-term expectations remain well above the CB's punctual target. Indeed, we see Borja voting for a 50bps policy rate cut in June, with the bulk of the board, and then voting for 25bps cuts in both Q3 sittings.

Sheinbaum tells steel and aluminum business leaders that her responsibility is to protect the labor force (La Jornada)

Marcelo Ebrard has a near-impossible mission in the US regarding steel tariffs (El Financiero)

Govt eyes national steel in public works following Trump's tariffs (Expansión)

Sheinbaum backs INE's criteria to define the new Supreme Court's president (El Economista)

Investors gamble Sheinbaum will rescue PEMEX (El Financiero)

PEMEX plans layoffs in 2025 and 2026 (El Sol de México)

US ambassador asks unity to face China's threats (Milenio)

Meeting with CNTE union ends without agreements; violence erupts near State Ministry (Animal Político)

Highways' works advance, to add MXN 112bn in investment (La Razón)

The president says govt analyzes the reasons behind the remittances' 12% drop (La Jornada)

Private consumption posts firs fall in Q1 since 2021 (El Economista)

Judge confirms the validity of the apprehension order vs Silvano Aureoles (La Jornada)

• Court will be crucial to control the judiciary
• Consolidates MORENA's control over the judicial branch, as expected

MORENA-linked candidates will win all seats of the Judicial Discipline Court (TDJ), according to the partial count held by the National Elections Institute (INE). This is an unsurprising result, considering little participation rose the importance of corporative votes, giving the regime a clear path to legitimize an ad hoc court. With 82.0% of the votes counted, all the five justices elected will have been proposed by President Claudia Sheinbaum or will be currently holding office, having been proposed to such seat by ex-President Andrés López.

Celia Maya seems set to win the court's presidency, with 8.0% of the votes casted. This little share is in line with the weak participation seen on Sunday. She is closely followed by Eva de Gyves, with 7.6% of the votes. We believe the presidency of the court is irrelevant at the macro level, even if it should have political ramifications within MORENA's elite.

Overall, assuming control of this court is fundamental for MORENA's effort to gain full control over the judiciary. The TDJ was created by the constitutional reform promoted by ex-Pres López that brought about the judicial election. The court is in charge of the discipline of the personal of the judicial branch, the constitution now says. This powerful court will be able to investigate, relocate, evaluate, suspend and remove judges; moreover, its decisions cannot be challenged at any other court. Thus, by gaining control of this court, MORENA's regime will be able to pressure all federal judges, further hurting the rule of law and the division of power.

• Local authorities still look to bargain, will look to avoid tariff
• But Pres Sheinbaum suggests retaliatory measures may be on the table

US President Donald Trump rose the tax on foreign aluminum and steel, including Mexico's output, from 25 to 50% on Tuesday. Economy Minister Marcelo Ebrard said on Tuesday that Mexico will be calling the US government to give Mexico and exemption, announcing he'll be traveling to Washington on Friday to hold talks with US officials.

President Claudia Sheinbaum said Mexico will be announcing next week measures to protect domestic producers if talks with the US fail. She did not detail if these measures will include retaliatory tariffs on US goods. We note Mexico has not imposed retaliatory tariffs on US goods despite the protectionism imposed by the US administration and seems unlikely to do so, seemingly hoping not to enrage US President Trump.

Pres Sheinbaum notes these tariffs violate the US-Mexico-Canada Agreement (USMCA).

Overall, we doubt the Sheinbaum administration will take a stand to pressure the US away from these tariffs. We expect the administration will continue to hold talks with the US, trying to meet their demands. However, the US continues to impose tariffs that are certainly disrupting regional trade and are hurting key industries in both sides of the border, something that requires a more proactive approach, in our view. Furthermore, it's unclear how these tariffs will curve USMCA talks, set to begin later this year, considering the market may likely show tremors if some industries, like steel and aluminum, seem in path to fall out of the deal.

• Next MPC meeting: June 26
• Current policy rate: 8.50%
• EmergingMarketWatch forecast: 50bps cut

The latest sitting minute confirms the CB is likely to cut its Monetary Policy Rate (MPR) by 50bps on June 26, bringing down the policy rate to 8.00%. This is unsurprising. However, the minute shows one board member is on the fence about the magnitude of such a cut. We believe this was Deputy Jonathan Heath, who we now expect will vote for a 25bps cut in June, particularly after analysts continued to raise their 2025-end CPI inflation forecast.

Data Download

Indeed, the market now expects CPI inflation to close the year at 3.90%, closing on the upper end of the CB's tolerance band. This revision comes after a disappointing print in May H1, with CPI inflation accelerating to 4.22%, per data published by the stats office INEGI.

Indeed, new revisions of year-end CPI inflation forecasts could push up our 2025-end MPR forecast. Still comments by Deputy Governor Galia Borja, who we see as one of the kingmakers in the Monetary Policy Council (MPC), anticipate there is room to cut the policy rate by 100bps while keeping it firmly in restrictive territory. This tells us the CB is sure to cut its policy rate to at least 7.50% by year-end, as the market predicts. However, it won't surprise us if the CB moves away from calls to keep the MPR firmly in restrictive territory, so long as mid-term inflation expectation do weaken a bit, which should happen amid weaker growth expectations.

Looking at Q3, we fully expect continuous cuts, seeing all board members remain open to further easing. At least two are warning more gradual easing is needed ahead. Indeed, we expect the CB will agree to 25bps cuts in July and September, bringing down the policy rate to 7.50% by Q3-end.

The outlook thereafter is not so evident to us. Indeed, we continue to expect the MPR will close the year below the 7.50% market consensus. Whether the policy rate closes at 7.00 or 7.25%, however, may depend on how mid-term inflation projections perform.

Overall, we are confident the CB will cut its policy rate by 50bps in June. We expect the CB will be cutting its MPR during the rest of the year, so long as CPI inflation doesn't continue to accelerate. Indeed, there is uncertainty about the MPR's 2025-end position, given risks of regional protectionism and lingering inflationary pressures; still, we anticipate the policy rate will close the year at or below 7.25%. The policy rate might not end so low if core CPI inflation accelerates, if the Fed takes a hawkish stance, or if mid-term inflation expectations rise. In any case, 2026 easing is not to be continuous and might depend on the decline of mid-term inflation expectations or the board's willingness to agree to a more neutral stance of the CB's policy rate, something that might come if economic growth expectations continue to weaken.

• Non-adjusted data show a 1.2% y/y hike, favored by the calendar
• Consumption of imported goods rebounds, perhaps not fully transitorily

Private consumption fell by 0.24% m/m in March, per seasonally adjusted data published by the stats office INEGI on Wednesday. This suggests part of the February 1.40% m/m sa rebound was only a transitory fluke.

Data Download

Non-adjusted data show private consumption up by 1.2% y/y in March, breaking a 3-month declining trend. This rebound is likely to be transitory, in our view, considering the improvement is influenced by a positive calendar effect.

Private consumption of imported goods posted a massive m/m swing in March, up by 1.6% y/y after a 9.2% y/y fall in February. This swift swing is surely favored by the calendar; however, we speculate part of this rebound may not be transitory. In any case, this component may continue to post volatility, as the currency continues to fluctuate and regional trade conditions remain somewhat fluid.

Overall, private consumption should show some resilience in the first quarters of 2025, on the back of a strong labor market and still recovering real wages. However, private consumption is set to slow ahead, amid a global deceleration of the economy, pressed by falling public consumption and investment. In any case, the resilience of private demand will be crucial for the performance of the economy, with resilience being enough so far to keep the economy out of a technical recession early in 2025.

Trump signs order to raise tariffs on Mexican steel and aluminum to 50% (El Financiero)

Sheinbaum congratulates Hugo Aguilar for his arrival to the Supreme Court (El Economista)

INE's Taddei says whoever gets the most votes will preside the court (Reforma)

Hugo Aguilar, the indigenous lawyer that will preside the Supreme Court (Milenio)

This is how the Judicial Discipline Court is looking after the election, MORENA-linked candidates win too (Animal Político)

Every vote in 2025 was 161% more expensive than in 2024 (La Razón)

Sheinbaum highlights MORENA and its allies will govern 65% of Veracruz's society (El Economista)

Sheinbaum says MORENA-PT-PVEM grew in Durango (El Economista)

Federal cabinet will plan with Christopher Landau a visit by Marco Rubio (El Sol de México)

Slim becomes PEMEX's main partner (El Financiero)

• Second improvement in a row does not offset Nov-Jan contraction
• GFI is down 0.2% y/y in March, slowing its plunge on a calendar effect
• Deterioration comes on the back of machinery and equipment, with residential construction rebounding
• Improvements might be only transitory, calendar-driven

Gross Fixed Investment (GFI) grew by 0.28% m/m in March, per seasonally adjusted data published by the stats office INEGI on Wednesday. The improvement came on the back of the construction component, with investment in machinery and equipment down by 0.70% m/m sa. In any case, this is the second improvement in a row, in a positive and surprising swing; still, this rebound is not nearly enough to erase the dive posted in Nov-Jan.

Data Download

GFI declined by 0.2% y/y in March, per non-adjusted data. This shows a swift improvement from a 7.3%y/y contraction in February. However, this improvement is crucially driven by the calendar, with March GFI favored by the fact Easter was celebrated in April of this year, but in March of last year. In any case, the contraction came on the back of investment in machinery and equipment and non-residential construction, with residential construction gaining momentum, posting an impressive 20.5% y/y hike in March.

Overall, while this is a surprisingly positive print, we warn this relative improvement is likely to be transitory. The favorable calendar effect driving non-adjusted data comparisons will swing to be a negative effect in April, anticipating a sharp contraction y/y. Moreover, even seasonally adjusted figures are unlikely to maintain their rebound, considering reigning uncertainty. Any resilience should be welcomed, as they anticipate a moderate performance of the aggregate demand component that is likely to perform the worst in 2025.

• Plant is now largest operational wind farm in Africa

Dubai-based renewable energy company AMEA Power announced the successful commissioning of its 500 megawatts (MW) wind power plant in Egypt. Located in Ras Ghareb in the Red Sea Governorate, the facility is now the largest operational wind farm in Africa.

The Amunet Wind Power Plant is a joint venture between AMEA Power (60%) and Sumitomo Corporation (40%). It is expected to generate 2,500 GWh of clean electricity annually-enough to power more than 500,000 homes.

This milestone follows the commissioning (November 2024) of AMEA Power's 500 MW solar PV plant in Aswan, bringing the company's total commissioned capacity in Egypt to 1 gigawatt (GW) within six months. AMEA Power is a developer, investor, owner and operator of renewable energy projects.

AMEA Power's portfolio in Egypt:

• 500 MW Solar PV Plant in Aswan Governorate
• 500 MW Wind Farm in Red Sea Governorate
• 1,000 MW Solar PV with 600 MWh Battery Energy Storage System (BESS) in Aswan Governorate
• An additional 500 MW Wind Project in Red Sea Governorate
• An extension of the 500 MW Solar PV Plant with a 300 MWh BESS in Aswan Governorate
• 500 MWh BESS Project in Zarfana
• 1,000 MWh BESS Project in Benban

Here is some background about electricity generation in Egypt:

As of 2024, Egypt's electricity generation is predominantly fossil fuel-based (89%), with hydroelectric power contributing about 6% and wind and solar combined around 5%.

Egypt's 2035 Integrated Sustainable Energy Strategy targets increasing renewable energy's share in electricity generation to 42%, with solar providing 25%, wind 14%, and hydropower about 2% by 2035.

We think Egypt is ideal for solar power because it has abundant solar resources, with average solar radiation around 3,050 hours of sunlight per year and high solar irradiance between 2,000 to 3,200 kWh/m²/year.

Additionally, Egypt benefits from outstanding wind energy conditions, especially in the Gulf of Suez region, where average wind speeds exceed 9 meters per second and wind power density can reach over 600 W/m². Wind power density is measured as the amount of wind energy available per unit area, typically expressed in watts per square meter (W/m²).

• Central bank is now unlikely to ease rates when it meets on July 10

Annual urban consumer price inflation jumped to 16.8% in May, up from 13.9% in April, according to statistics agency CAPMAS. This marks the third consecutive month of rising inflation, driven largely by sharp increases in food and non-alcoholic beverage prices, housing and utilities, and transport costs.

The next meeting of the Central Bank of Egypt's (CBE) Monetary Policy Committee (MPC) is on July 10 and this unexpected inflation jump makes it very unlikely the committee will cut interest rates.

The CBE initially raised interest rates sharply in early 2024 to curb inflation and support foreign investment, with a notable increase of 600 bps in March 2024 to rates above 27%. However, as inflation showed signs of easing through early 2025, the CBE began cutting interest rates for the first time since 2020.

On April 17, the CBE reduced overnight interest rates by 225 bps, followed by another 100 bps cut on May 22, bringing the overnight deposit rate down to 24% and the lending rate to 25%.

We think the CBE was justified in making these rate cuts as a response to lower inflation and a sustained recovery in economic activity. However, unexpectedly higher inflation in May will likely make the CBE more cautious in extending its monetary easing cycle.

• We expect FX reserves to rise in June as well

Egypt's net international reserves rose by USD 0.4bn or 0.9% m/m, to USD 48.5bn as of end-May, reaching the highest level in more than two decades, according to the central bank.

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 another USD 1.2bn tranche in early April 2025.

IMF's program is centred 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.

• UAE is second-largest supplier of aluminium to US

The US and the UAE have agreed to start negotiations for a potential bilateral trade agreement that could ease tariffs on the UAE's steel and aluminium industry, according to Reuters. Emirati officials discussed the possibility of a trade agreement with US counterparts during President Donald Trump's visit to Abu Dhabi in May.

The US introduced a 10% baseline tariff on the UAE's exports to the United States, just like it has with other countries, shortly after Donald Trump became office. Additionally, the US imposed a 25% tariff on the UAE's steel and aluminium products, and now it is doubling that tariff to 50%.

The UAE is the second-largest supplier of aluminium to the US, after Canada, accounting for about 8% of total US aluminium consumption in 2024. US imports of iron and steel from the UAE were about USD 190mn in 2024.

The UAE will likely call any trade agreement with the US a Comprehensive Economic Partnership Agreement (CEPA) - the branding it uses for its other trade deals.

• UAE to sell FALAJ 3-class missile boats to Kuwait

State-owned military conglomerate EDGE Group has signed a defence contract worth AED 9bn (USD 2.45bn) with the Kuwait Ministry of Defence for the supply of FALAJ3 missile boats, according to the UAE's official news agency. EDGE will also provide the ammunition for the vessels. Abu Dhabi Ship Building (ADSB), EDGE Group's naval arm, will be the subcontractor.

The FALAJ 3-class missile boat is used by the UAE Navy. It is a naval patrol vessel designed for both littoral (coastal) and blue water (open sea) operations. Here is some additional information, from the website of EDGE:

We should note that the UAE and Kuwait enjoy warm military relations. The Kuwaiti National Guard and UAE National Guard regularly conduct joint military exercises to enhance cooperation and share expertise in military operations. The UAE supported Kuwait during the Gulf War (1990 - 91) by condemning Iraqi aggression.

• Fitch projects rapid growth in Nigeria's Islamic finance sector from H2 2025 through 2026
• Islamic banking assets surged 110% y/y in 2024, driven by rising deposits and loans
• Corporate sukuk issuance remains absent due to low demand and weak incentives

Nigeria's Islamic finance industry is set for rapid expansion in the second half of 2025 through 2026, according to a note by Fitch Ratings. The sector is estimated at USD 4bn as of May 2025, with growth expected to be driven by the reintroduction of sovereign sukuk issuances, new liquidity management tools for non-interest financial institutions, and higher paid-in capital requirements. Regulatory measures introduced by the CBN include non-interest repurchase agreements, asset-backed securities and notes. These are aimed at addressing market gaps and improving funding and liquidity options for Islamic banks. Although the Islamic finance sector remains relatively small compared to conventional institutions (capturing just 1.7% of total banking assets at end-2024), its structural foundations are improving according to Fitch. Jaiz Bank, the country's first non-interest bank, holds 38% of the sector's assets, while the industry continues to benefit from Nigeria's large Muslim and unbanked population.

Fitch notes that despite a sevenfold oversubscription of Nigeria's eighth sovereign sukuk in May 2025, the country's overall sukuk market remains underdeveloped with outstanding sukuk accounting for less than 2% of the total debt capital market. Corporate and institutional sukuk issuance remains absent due to weak incentives, limited demand and issuance complexity. However, Islamic banking assets grew by 110% y/y in 2024 and a new entrant called Summit Bank joined the market. Still, overall market penetration remains low with only five non-interest banks. Takaful and sharia-compliant funds also remain marginal, comprising less than 1% of total insurance assets. Nonetheless, Fitch's April 2025 upgrade of Nigeria's credit rating from 'B-' to 'B' signals improved investor confidence in response to the government's economic reform agenda initiated in mid-2023.

• 90.8% of businesses cited fuel and electricity costs as primary causes of inflation
• Exchange rate volatility (88.5%) and transportation costs (87.2%) also rank high
• Lower-income and urban households reported the most inflation concern

According to the CBN's May 2025 inflation expectation survey, 90.8% of businesses identified energy expenses as the top inflation driver. This particularly relates to the costs of fuel, diesel and electricity. Despite the monetary policy rate being held at 27.5% as part of a tight monetary stance, the findings suggest inflation is being fuelled more by supply-side challenges than by excessive demand. Beyond energy, other major contributors to inflation include exchange rate volatility (cited by 88.5% of firms), transportation costs (87.2%) and interest rates (85.5%). These were followed by concerns about insecurity (84.7%), rising input costs (78.3%) and inadequate infrastructure (75.0%). Households also ranked transportation and exchange rate issues as key concerns. They and businesses both placed less emphasis on factors like natural disasters, which they viewed as less influential.

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The survey further showed that inflation perceptions are worsening. In May, 75.3% of all respondents believed inflation was high, up from 70.0% in April. Among households, this figure reached 79.6%. Inflation concerns were most severe among households earning between NGN 30,001 and NGN 100,000, while urban and rural households expressed nearly equal levels of concern. Looking ahead, 43.1% of households and 29.7% of businesses expect inflation to rise in June. Meanwhile, 75.1% of firms and 67.1% of households anticipate higher spending.

Presidency splurges N23bn on forex for foreign trips (Punch)

Group urges terminal to suspend empty container intake (Punch)

Niger flood victims get N2bn lifeline as Shettima visits (Punch)

Denmark partners AAPW to tackle climate change in N'Delta (Punch)

Port Harcourt refinery community sets 30-day maintenance deadline (Punch)

Oando Secures $375m AfreximbankFacility to Power Upstream Growth (ThisDay)

Fitch: CBN Reforms To Power $4bn Boom In Nigeria's Islamic Finance Market (ThisDay)

NEMA DG Receives World Bank Delegation On Strengthening Emergency Preparedness (ThisDay)

Bill Gates urges Nigeria to sustain its commitment to polio eradication amid tightening funds (Nairametrics)

NCC moves to secure Nigeria's telecom sector with new cybersecurity strategy (Nairametrics)

• President Tinubu approved funding for rebuilding homes destroyed by flooding
• Ministers of environment and agriculture were directed to relocate to Mokwa for intervention

President Bola Tinubu approved NGN 2bn for the immediate reconstruction of homes for flood victims in Mokwa, Niger State. During a visit to the affected area on Wednesday (June 4), vice president Kashim Shettima announced the funding and said the president had instructed the ministers of environment and agriculture to relocate to the state for urgent intervention. Twenty trucks of food items have been approved for distribution to the victims, in coordination with the village head of Mokwa. Tinubu also ordered the urgent repair of damaged bridges and the rehabilitation of drainage systems in the town. The flood began on May 28 and claimed over 200 lives, with search and recovery operations still ongoing. According to the state's commissioner for humanitarian affairs, hundreds of bodies remain unaccounted for and the true scale of the disaster is still being assessed.

Vice president Shettima commended the efforts of deputy governor Yakubu Garba and the National Emergency Management Agency (NEMA) for their swift response. Garba said the damage caused by the disaster includes the destruction of over 2,000 homes and the collapse of four bridges, which disrupted mobility and economic activity. He appealed for rapid federal intervention and offered available land for the resettlement of displaced residents. Many victims have voiced frustration over inadequate relief. Survivors report poor conditions in the camps and insufficient food supplies. Garba also called for the deployment of ecological experts to address environmental challenges in the town.

Govt eases SEZ rules to promote chips, electronics component manufacturing (Business Standard)

Services sector growth steady in May as export demand remains strong: PMI (Business Standard)

Moody's review meet with govt to focus on global trade, Indo-Pak conflict (Business Standard)

India gets major investment boost during Piyush Goyal's Italy visit as top firms pledge expansion, increased commitments (Economic Times)

Structural gains may take India's agriculture to $1.4 trillion by 2035: McKinsey (Financial Express)

Diverse funding sources crucial to bridge funding gap for energy infra: Moody's (Financial Express)

Pakistan PM Sharif's frantic message to provinces as India's IWT move keeps Islamabad on edge (Money Control)

India Red-Flags $800 Million Asian Development Bank Aid Package To Pakistan (www.ndtv.com)

Pakistan PM Shehbaz Sharif turns to Trump, asks for dialogue with India after Operation Sindoor (www.indiatvnews.com)

• Technical review to take place over next two years
• Govt aims to complete accession talks by 2029

The government submitted the initial memorandum to the OECD, EconMin Airlangga Hartarto said. This should be market positive as it would improve Indonesia's image among investors, the EconMin added. Moreover, OECD membership would open the door for more investment, as well as increase Indonesia's trade partners, Airlangga said.

The accession process would continue with a technical review, which would last approximately two years. The government aims to complete the accession talks and join the OECD by 2029, which is when President Prabowo Subianto's term in office expires.

We remind that prior to the OECD, Indonesia joined BRICS last year in a bid to expand its trading partners and secure funding for infrastructure projects from BRICS's New Development Bank.

Indonesia Attributes Falling Oil and Gas Output to IMF Policies (Tempo)

Indonesia Highlights Advantages of Joining OECD (Tempo)

OECD Cuts Indonesia's Economic Growth Projection to 4.7% (Tempo)

Indonesia, US Continue Talks on Reciprocal Tariffs (Tempo)

Headline Indonesia Sees Trade Deficit with China Double, Rejects Link to US Tariffs (Jakarta Globe)

Govt Drafts New Regulations to Woo More Investors Into Infrastructure Projects (Bisnis)

Economic Stimulus Needs to be Followed by Increased Government Spending (Republica)

• GDP growth to accelerate to 4.8% in 2026
• The OECD expects continued easing of monetary policy in 2025 and 2026

The OECD forecasts that Indonesia's GDP will rise by 4.7% in 2025 and 4.8% in 2026, according to the OECD Economic Outlook released in June. In March, the two growth rates were seen at 4.9% and 5.0% respectively. Private consumption and investment will benefit from low inflation and easing financial conditions, the latest publication said. On the other hand, the report notes the uncertainty about domestic fiscal policy. In addition, export growth is expected to decelerate amid global trade tensions.

The CPI inflation is seen at 2.3% in 2025 and 3.0% in 2026. Bank Indonesia's inflation target range is 2.5+/-1%. The OECD expects continued easing of monetary policy this year and next year. The financial conditions are still restrictive, the report said. The document sees space for the central bank to further cut the policy rate to about 5% from 5.5% currently.

Fiscal policy is predicted to be broadly neutral this year, with increased spending on a free meals programme and additional public investment through Danantara to be accompanied by across-the-board spending cuts elsewhere. The government budget deficit is hence expected to widen from 2.3% of GDP in 2024 to 2.8% in 2025, still below the statutory limit of 3% of GDP.

Click here for our comprehensive database of macro forecasts.

Provinces take the lead on Rs4.2tr in uplift spending (Dawn)

IMF wants 'strict compliance' as budget enters final stages (Dawn)

Punjab to fund its new tariff cut with power plants' profit (Dawn)

PM approves plan to cut import duties on raw materials (Dawn)

Importers struggle for dollars despite higher inflows (Dawn)

Punjab mulls waiving tax on local cotton (Dawn)

Balochistan amends ATA, allowing detention sans charge for three months (Dawn)

PM Shehbaz invites Omar Ayub for consultation on new ECP chief (Express Tribune)

PM to embark on official visit to Saudi Arabia today (Express Tribune)

Govt decides to tighten solar net metering rules (Express Tribune)

Govt eyes 7,000 MW power sale to industry, agri at 7 cents amid IMF talks (The News)

Gas sector circular debt soars to Rs2,800bn, worries govt functionaries (The News)

Shehbaz heaps praise on Trump, calls him 'man for peace' (The News)

• Domestic debt rose sharply while external debt too maintained uptrend
• Debt accumulation accelerated during July-April FY25
• IMF sees public debt to remain sustainable over the medium term

The central government debt rose by PKR 1.25tn m/m in April, the most in four months, reaching an all-time high of PKR 74.9tn, data from the State Bank of Pakistan showed. Reliance on local commercial banks for plugging the budget gap continued, pushing the domestic debt to PKR 52.5tn, up by 1.0tn m/m. It is interesting to note that the stock of T-bills snapped a six-month downtrend, gaining PKR 468.8bn m/m in April. That said, the share of short-term debt in total domestic debt remains contained at 15.9%, reflecting the government's efforts to lengthen the maturity profile to support debt sustainability.

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Moreover, external debt has been on an uptrend as well due to greater access to external financing amid improving macroeconomic conditions. It increased by PKR 242.8bn m/m in April, the most since November 2023, to PKR 22.4tn. This figure excludes IMF obligations and foreign exchange liabilities, which, according to a separate SBP data, stood at USD 20.1bn (PKR 5.6tn) at end-March.

Overall, the pace of debt accumulation accelerated in the first ten months (July-April) of FY25. The government added PKR 6.0tn to its debt, up from PKR 5.2tn in the same period last year. The bulk of the increase (PKR 5.4tn) came on the back of domestic debt, driven by issuance of long-term conventional and Sukuk bonds. The debt-to-GDP stood at 60.4%, according to our calculations.

In its staff report released last month, the IMF said that Pakistan's public debt remains sustainable over the medium term, underpinned by ongoing fiscal consolidation efforts and lengthening of domestic debt maturities. Nevertheless, it cautioned that near-term risks of sovereign stress remain elevated, citing the country's substantial gross financing needs and past challenges in securing external financing.

• Exports fell while imports increased
• The deficit rose by 10.6% y/y in July-May FY25
• Strong remittances have helped offset the impact of widening goods trade deficit

Pakistan's goods trade deficit rose by 26.1% y/y to USD 2.6bn in May, according to data from PBS. Exports stood at USD 2.6bn, down by 10.1% y/y, whereas imports increased by 5.2% y/y to USD 5.2bn. Sequentially, the trade deficit narrowed from USD 3.4bn in April as exports rebounded notably, suggesting that the US trade tariffs have not yet significantly affected outbound shipments. The US accounts for about 18% of Pakistan's total exports. Imports also declined on a monthly basis.

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In the first eleven months (July-May) of FY25, Pakistan saw a goods trade deficit of USD 24.0bn, up from USD 21.7bn in the same period last year. Exports grew by 4.7% y/y to USD 29.4bn, primarily driven by higher textile shipments, along with increased exports of refined fuel, plastic materials, and pharmaceutical products. However, imports rose at a faster pace of 7.3% y/y to USD 53.5bn, fueled by stronger economic activity that boosted demand for machinery, metal and vehicles. Additionally, a decline in domestic cotton output led to higher imports of raw cotton. Despite a significant rise in oil import volumes, lower global oil prices helped limit the overall import bill.

Pakistan's external sector remains stable, as shown by the healthy current account position, bolstered by robust remittance inflows that have helped offset the impact of a widening goods trade deficit. However, the greatest challenge to the country's export outlook is the proposed 29% US tariff, which is set to take effect in July if the government fails to secure concessions from the Trump administration.