Macro and Politics

* We expect the Monetary Policy Committee (MPC) to deliver a 250bps rate cut at today’s rate-setting meeting, in line with the market consensus. We also expect the upper bound of the interest rate corridor to remain asymmetrically positioned, maintaining a 300bps spread above the policy rate. We anticipate the decision note to retain the statement that “All monetary policy tools will be used effectively in case a significant and persistent deterioration in inflation is foreseen,” and that the Committee will maintain a cautious stance along the rate-cutting path. Additionally, the tone of the inflation-related language in the communiqué will provide valuable signals regarding the policy outlook. Following the recent increase in withholding tax on short-term deposits and mutual funds, market participants have scaled back expectations for a more aggressive easing cycle. While a 250bps cut appears to be the median expectation, some survey participants are leaning toward a more substantial easing of 300–350bps, a view largely premised on a return to the pre-March 19 policy rate level of 42.5%. That said, we believe the fact that macro-financial conditions have yet to fully normalize compared to the pre-March environment remains the key constraint against a cut exceeding 250bps. For the CBT to move beyond the 250bps pace observed in early 2025, a more favorable backdrop would be required. In our view, such conditions are not yet in place. In fact, although the reserve accumulation process continues, we note that net FX reserves excluding swaps remain at USD 41bn – still well below the USD 65bn peak recorded in mid-March. This underscores the need for a prudent policy stance. Overall, we expect the easing cycle to begin with a 250bps cut in July, paving the way for the policy rate to decline to 36% by year-end.

* The consumer confidence index dropped from 85.1 to 83.5 level in July, indicating the lowest level since February. It is important to underscore that the consumer confidence index — which ranges from 0 to 200 — signals pessimism when it falls below 100, and optimism when it exceeds that threshold. A breakdown of the July consumer confidence index reveals the following: The sub-index reflecting the financial situation of household at present decreased from 69.3 to 68.2, while the sub-index measuring financial situation expectation of household over the next 12 months eased from 85.8 to 84.6. Moreover, general economic situation expectation over the next 12 months decreased from 82.4 to 79 and finally, the sub-index tracking assessment on spending money on durable goods over the next 12 months — a key indicator of domestic demand — edged down from 102.6 to 102.3 level in July.

* The CBT will release weekly foreign portfolio flows, money & banking statistics, and international reserves for the period of July 11 – 18 @ 14:30 local time. To recall the data from previous week: In the week of July 4 – 11, foreign investors were the net buyer in the equity market at an amount of USD178.6mn, while registering net outflow of USD493mn from government bonds (excluding repo transactions). Thus, the foreigners’ share in total bond stock decreased from 6.3% to 6.2%. Moreover, during the mentioned week, residents’ total FX deposits (including gold, price adjusted) climbed by USD1.4bn. Besides, the CBT’s gross FX reserve rose by USD1.8bn to USD166.4bn, while net international reserves surged by USD2.3bn to USD59.7bn. Net reserves excluding swaps also soared by USD2.9bn to USD41bn.