Emerging Europe


Virus outbreaks diverge, but Omicron a renewed risk

COVID-19 outbreaks in Central and Eastern Europe have diverged in the past month and that may continue in December, but the emergence of the potentially highly-transmissible Omicron variant could replace Delta as the dominant strain and result in severe virus waves across the region. The recent experience is that there is a high bar for economically-damaging containment measures. But Omicron could change that if health systems come under increased strain, prompting a renewed downturn in activity. While our baseline view is that this won’t happen, renewed virus outbreaks – coming alongside other headwinds in the form of supply chain disruptions and surging inflation – means that the pace of growth is likely to slow sharply in the coming months.

30 November 2021

Macro fundamentals to support further shekel strength

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.

24 November 2021

BoI offers no new guidance, 2022 rate hike still in play

The Bank of Israel (BoI) left its policy rate on hold at 0.10% as expected at its meeting today, confirmed that it will end its bond purchase programme next month and emphasised that it will continue to intervene in the FX market for as long as necessary. The strengthening of the shekel will bear down on inflation, but we think that an interest rate hike next year remains in play.

22 November 2021
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Israel GDP (Q3 2021)

Israel’s economy slowed much more sharply than expected in Q3 as a shift in consumption habits away from goods and a fading of the re-opening boost to services caused a marked slowdown in consumption growth. We think the economy will maintain a steady pace of growth in the coming quarters and that the central bank will be in no rush to raise interest rates next year.

Israel Consumer Prices (Oct.)

The much-weaker-than-expected rise in consumer prices in Israel in October was due to a sharp fall in airfares, but the big picture is that underlying inflation pressures generally remain soft. We don’t think the central bank will be in a rush to raise interest rates any time soon.

Fiscal policy in Israel set to lose its punch

The phasing out of crisis support and strength of tax revenues have boosted Israel’s public finances and the conservative stance of last week’s budget will help to narrow the deficit towards 3% of GDP in 2022, although we don’t think this will derail the recovery. Meanwhile, the government’s reform package brings some long-overdue policies to support medium-term growth prospects and lower the cost of living.

Five points on the latest virus developments in EMs

The COVID-19 situation in many EMs has improved markedly over the past month or so as new infections have fallen sharply and vaccine rollouts have gathered pace. That said, the recent surge in virus cases in Emerging Europe serves as reminder that the risk of renewed outbreaks lingers, particularly where vaccine coverage is low. Countries in Sub-Saharan Africa still look particularly vulnerable on this front.

Israel passed a budget, hawks in flight, Turkey déjà vu

The Israeli budgets for 2021 and 2022 passed this week – the first approved budgets in three years – don’t make a big difference to the direction of fiscal policy, but contain key reforms that may help to support growth in the medium term. Elsewhere, the hawkish surprises from central banks in Poland and Czechia this week are likely to be followed by Romania's central bank at its meeting next week. Finally, concerns have continued to build that Turkey is on the brink of another currency crisis - while there are similarities with 2018, one key difference is that the lira does not look misaligned as the current account is in much better shape.

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