The data from Emerging Europe at the start of 2018 have painted a bright picture. Our weighted average of the European Commission’s Economic Sentiment Indicators for Central and Eastern Europe (CEE) hit its highest level since 2008 last month, while Turkey’s manufacturing PMI rose to a seven-year high. Even in Russia, where growth slowed sharply over the second half of last year, the data for January show that the economy has now turned the corner. In CEE, the consensus seems to be moving towards our view that strong growth will push inflation up. However, our assessment that this will prompt tighter monetary policy across the region isn’t yet priced into financial markets. Elsewhere, stronger growth in Russia is unlikely to be accompanied by a sharp rise inflation and we think interest rates will be cut by more than most expect.
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