Inflation concerns should fade in second half of 2011

Inflation is rapidly moving up the list of concerns for policymakers in Emerging Europe. It is now running above target in most of the region’s major economies, including Poland, Hungary, Romania and the Czech Republic and is above the government’s ‘comfort zone’ in Russia too. But the vast bulk of the recent pick-up in inflation is linked to rising global commodity prices. Food and energy inflation is likely to accelerate further over the first half of this year, but should start to moderate thereafter. Meanwhile, core inflation pressures are likely to stay contained in most economies (the exception is perhaps Turkey and Russia). The upshot is that inflation should start to ease in most economies over the second half of this year and into 2012. In the meantime, further (moderate) interest rate hikes are likely in Russia and Poland, but the bulk of any monetary tightening in the region is likely to come in the form of increased bank reserve requirements.