Emerging Europe

Russia

CBR accelerates its tightening cycle again

Russia’s central bank (CBR) stepped up the pace of its tightening cycle again at today’s meeting with a larger-than-expected 75bp interest rate hike, to 7.50%, and the hawkish tone of the accompanying communications suggest that further tightening will be needed. We think the policy rate will be hiked to 8.25% by year-end and remain higher than most expect throughout 2022.

22 October 2021

Near-term recovery to face stronger headwinds

The region has experienced a rapid recovery, but the re-opening boost has now faded and the region is likely to face stronger headwinds in the near term due to surging COVID-19 cases, rising inflation and supply disruptions. Central European economies are vulnerable to shortages of key production inputs in the auto sector and low vaccine coverage countries such as Russia, Romania and Ukraine look most at risk of imposing tighter containment measures. Inflation is likely to remain stubbornly high over the coming months and central banks are likely to continue their front-loaded tightening cycles well into next year.

20 October 2021

Supply shortages take their toll

The supply shortages that have affected many DMs have also intensified in emerging economies over the past couple of months. The automotive sector has been hit hard by global semiconductor shortages, weighing on recoveries in Mexico, Czechia and Hungary in particular. More broadly, EM manufacturers are struggling to meet new orders, causing backlog of works to increase. Meanwhile, recent power shortages have weighed on recoveries in China, India and Brazil. As shortages continue, they are likely to not just weigh on growth, but also add to upward pressure to core inflation. That will probably keep central banks in Latin America and Central Europe in particular in tightening mode.

18 October 2021
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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.

Car woes to weigh on recoveries in Mexico & CEE

The supply constraints that have hit global vehicle output have probably reduced the level of GDP by a modest 0.1-0.2% in most EM auto producers, but some countries like Czechia, Hungary and Mexico have suffered much bigger blows. And the drag from vehicle production is likely to persist for some time yet.

Russia Consumer Prices (Sep.)

Russian inflation accelerated to a fresh five-year high of 7.4% y/y in September and, while this was mainly driven by a sharp increase in food inflation, the central bank is likely to continue its tightening cycle for a little longer at the next couple of meetings.

Russia Activity Data (Aug.)

Russia’s hard activity data for August showed that industry has continued to struggle while loose fiscal policy has supported consumer spending. We think that consumer demand should hold up well at the start of Q4 amid the tailwind from loose fiscal policy and higher social payments in September.

Loose fiscal policy in CEE, Russia’s natural gas windfall

Government draft budgets approved for 2022 this week in Czechia and Poland and further details of social support in Hungary suggest that fiscal policy will remain supportive of growth in Central Europe. But with spare capacity increasingly limited, this will continue to fuel strong inflation pressures. Meanwhile, European gas prices surged to new highs this week and Russia will be one of the main beneficiaries - gas exports could be as much as $75bn higher in the second half of the year than would otherwise have been the case. This will also support the budget position and may prompt the government to further relax its grip on the public finances.

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