Capital Economics

Emerging Europe Economics Weekly

Erdogan playing with fire, Russia’s commodity boom

After putting the final nails in the coffin of the Turkish central bank's credibility with last month's surprise interest rate cut, the grave started to be dug this week with the firing of three MPC members. Further large interest rate cuts seem increasingly likely and the lira is heading in only one direction - the risk of a balance of payments crisis akin to that in 2018 will mount. Meanwhile, Russia's balance sheets have improved markedly in recent months amid the surge in global commodity prices, but we think any additional boost from loose fiscal policy will be limited and the factors supporting the ruble are likely to turn into slight headwinds next year.

15 October 2021

Emerging Europe Data Response

Israel Consumer Prices (Sep.)

The further rise in Israeli inflation to 2.5% y/y in September contained no major surprises and we think it will ease towards the lower end of the central bank’s 1-3% target next year. Even so, with the recovery motoring on and the central bank eager to rein in policy support, a small rate hike next year looks likely.

15 October 2021

Emerging Europe Economics Focus

CEE: rapid wage growth to fuel above-target inflation

Central and Eastern Europe is one of the regions of the world where we think that the risk of sustained higher inflation in the next few years is greatest. The Phillips curve is alive and we think the combination of a cyclical recovery in demand for labour alongside structural labour shortages will feed into stronger wage growth and keep inflation above central banks’ targets. This is not fully appreciated by most and we think interest rates will ultimately settle at a higher level than most expect in two-to-three years’ time.

13 October 2021

Our view

Economies across Emerging Europe enjoyed a rapid rebound in Q2, but the recovery has come off the boil in Q3 and growth is likely to slow further in Q4. The re-opening boost to services sectors has faded and supply chain disruptions and raw materials shortages are now taking a greater toll on industry. Auto sectors in Central Europe are likely to struggle over the coming months. Meanwhile inflation will rise further above central banks’ targets and interest rates are likely to rise sharply in most countries – Turkey is an exception, where aggressive easing lies in store over the coming months.

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