Hawkish shift across the region

Central banks across Emerging Europe have become increasingly hawkish in the past few weeks, supporting our view that policy in the region will (in most places) be tighter than most expect over the coming years. A sell-off in the lira since early May has forced Turkey’s central bank (CBRT) into a series of aggressive rate hikes. Meanwhile, mounting capacity constraints have prompted central banks in the Czech Republic and Romania to resume tightening cycles, and Hungary’s MPC signalled that ultra-loose monetary policy will be reined in. Russia’s central bank also adopted a more hawkish stance this month, keeping rates on hold and warning about inflation risks stemming from a VAT hike in January 2019. We see more tightening than is widely-anticipated in Central and Eastern Europe over the next eighteen months, while rates will need to remain high in Turkey. The exception to all of this is Russia, where we think that the easing cycle will be resumed later this year. Markets, in contrast, expect no more loosening.