Gas prices rocket, CBRT tinkers, chip shortages mount

The recent surge in European gas and coal prices adds to the price pressures facing the region and will push headline inflation rates further above central banks' targets in the coming months. Meanwhile, the decision by Turkey's central bank to hike FX reserve requirements this week should help to mitigate the impact of the phasing out of the reserve option mechanism next month. The move also comes against a backdrop of growing expectations that the central bank is on the cusp of an easing cycle. Finally, data this week showed that shortages of semiconductors hit the Czech auto sector hard over the summer and the latest signs suggest that the sector will continue to struggle for a while yet.
Liam Peach Emerging Markets Economist
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Emerging Europe Economics Weekly

Lira crisis, MNB hikes, Ukraine-IMF, Romanian politics

This week has been dominated by the collapse in the Turkish lira and all our research on the crisis can be found here. While Turkey’s problems have been driven by a ‘head-in-the-sand’ approach to inflation and falls in the lira, Hungary’s central bank tightened policy further this week amid signs that officials across Central Europe are taking the inflation fight more seriously and becoming less tolerant of currency weakness. Elsewhere, the early signs are that a new grand coalition in Romania does not have the appetite for much-needed austerity. Finally, the latest tranche of IMF funds provide a welcome boost for Ukraine’s economy.
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Turkey’s public finances have become more vulnerable to falls in the currency in recent years, although we think the likelihood of sovereign default is very low. Perhaps the bigger risk for the public finances is that the pressure on the central bank to focus on growth is matched by a shift to a looser fiscal stance, causing the debt dynamics to worsen.

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The Israeli shekel has appreciated sharply in the past few weeks, making it one of the best performing currencies during the pandemic. While we don’t expect this recent strength to continue in the very near term, we think that Israel’s macro fundamentals will support further appreciation over the next few years. In view of the wider interest, we are also sending this Emerging Europe Update to clients of our FX Markets service.

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A victory for United Russia in the Duma elections this week will strengthen the government’s recent focus on state intervention in the economy. Social redistribution has become a key priority for the government and large businesses may end up paying for part of this. Longer-term, it reinforces our downbeat view on Russia’s medium-term growth prospects.

15 September 2021

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Israel Consumer Prices (Aug.)

The rise in Israeli inflation to an 8-year high of 2.2% y/y in August was partly driven by a chunky rise in housing costs, but there are signs that “re-opening inflation” in services has run its course. We think inflation will fall towards 1% next year and that the central bank will be in no rush to raise interest rates.

14 September 2021

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Poland-EU dispute, Russia’s fiscal plans, Turkish inflation

The Poland-EU dispute over the rule of law reached a breaking point this week and raises the threat of potential fines and a significant delay to receiving EU recovery funds, dimming an otherwise positive economic outlook. Meanwhile, fiscal policy looks like it will provide a slightly bigger boost to growth in Russia than we had expected over the next year, but we do not think this will threaten the government's long-standing aim for macro stability. Finally, developments over the past week suggest that officials in Turkey are taking their eye off inflation and preparing the ground for an interest rate cut.
CE Spotlight 2021: The Rebirth Of Inflation? We’re holding a week of online events from 27th September to accompany our special research series. Event details and registration here.

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