Currency sell-off highlights divisions in rate outlook

The sharp sell-off in the Russian ruble and Turkish lira this month couldn’t have come at a worse time for policymakers. Growth is sluggish in both countries, but high inflation and concerns about financial stability mean that monetary policy will need to remain tight. The Turkish central bank has already started to push up market interest rates. Meanwhile, rumours that Russia might consider introducing capital controls suggest at the very least that the authorities are becoming increasingly concerned by the economic damage inflicted by capital outflows. We expect a rate hike there next month. Elsewhere, currencies in Central Europe have also weakened against the dollar but, in contrast to Russia and Turkey, the economic implications are likely to be small. Inflation is low to start with. Moreover, currencies have been stable against the euro, in which most of their FX debts are denominated. The upshot is that monetary conditions are likely to remain extremely loose, and we expect the Polish National Bank to cut interest rates next month.