Rates heading for record lows (Jan 09)

The growth outlook for Emerging Europe continues to deteriorate sharply. With oil and food prices now a deflationary force, policymakers are rightly concerned about inflation undershooting rather than overshooting targets. Admittedly, concerns about the downside risks to currencies persist. But with interest rates in the West heading to zero there is scope for monetary policy in Emerging Europe to be eased significantly without impacting on relative interest rate differentials. What’s more, it seems that the pass through from weaker currencies to higher domestic prices may be limited by the collapse in demand. Accordingly, we expect rates in Emerging Europe to hit record lows over the coming months.