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Emerging Europe


Hawkish Fed adds to growing external risks

The 75bp interest rate hike by the US Fed this week and expectations for further large hikes in the coming months will have ripple effects across the region. It is likely that Hungary's central bank will be forced to raise rates to defend the forint again and we now expect the Turkish lira to end the year at 24/$. Elsewhere, the risk that gas flows from Russia to Europe are cut off has increased. The gas deal agreed between the EU, Egypt and Israel this week will boost Israel's exports, but it's likely to take many years before Israel becomes a major gas exporter. World with Higher Rates - Drop-In (21st June, 10:00 ET/15:00 BST): Does monetary policy tightening automatically mean recession? Are EMs vulnerable? How will financial market returns be affected? Join our special 20-minute briefing to find out what higher rates mean for macro and markets. Register now

17 June 2022

Lira on shaky ground, Russia dropping capital controls

The Turkish lira remained under pressure this week and the raft of policy measures announced on Thursday show that officials are doing whatever they can to avoid interest rate hikes. Capital controls are likely in the event of sharp and disorderly falls in the lira. In contrast, capital controls continued to be rolled back in Russia this week and it seems that policymakers are trying to fight back against the strength of the ruble. But a marked weakening of the currency seems unlikely so long as the current account surplus remains large. Elsewhere, strong inflation and activity data out of Central Europe suggest that further monetary tightening is on the cards.

10 June 2022

CBR lowers interest rates back to pre-war levels

The Russian central bank (CBR) delivered a 150bp interest rate cut to 9.50% today as its focus continued to shift away from inflation risks towards supporting the economy. We think further reductions are likely to be more gradual, with rates ending this year at 7.50%.

10 June 2022
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Russia Consumer Prices (May)

The sharp fall in Russian inflation in May to 17.1% y/y suggests that inflation may have already peaked and price pressures are likely to ease further in the coming months. This will give the central bank room to ease policy further, including with a 100bp rate cut, to 10%, on Friday.

Russia Activity Data (Apr.)

The April activity data for Russia released today show that the imposition of Western sanctions has caused a sharp fall in oil and gas production, a plunge in motor vehicles output and resulted in a 10% or so m/m collapse in retail sales.

West’s detachment from Russian energy gathers pace

The EU’s sixth round of sanctions on Russia marks yet another defining moment in the West’s detachment from Russia’s energy trade. The sanctions were widely telegraphed in advance, though, so for now we still forecast that crude oil prices will remain high but slide towards $100 per barrel by year-end.

Resilience so far, but weakness on the horizon

GDP across Central Europe expanded strongly in Q1 and the latest figures for March and April suggest that activity has remained resilient since the war in Ukraine started. Russia’s economy has not (yet) fallen off a cliff as had been expected. Industry in CEE is coping well with renewed supply chain disruptions. Consumer-facing sectors have been supported by strong wage growth and loose fiscal policy. And Turkey’s economy seems to have adapted to the high inflation environment. We maintain our view that activity will weaken in Q2 and that some economies will enter recession (particularly Russia) as the effects of the war bite harder. At this stage, however, there are some clear upside risks to our GDP forecasts emerging.

Russia default, Hungary budget plans, dovish CNB?

A Russian sovereign default moved a step closer this week, although in practice it’s unlikely to have a major impact on the economy. In the meantime, high oil and gas revenues have given the authorities room to row back on the emergency measures put in place in February and we expect further interest rate cuts. Elsewhere, the Hungarian government’s plan to rein in its budget deficit will weigh on growth over the next couple of years. Finally, although the incoming governor of the Czech central bank Aleš Michl made dovish comments this week, the rest of the board remains hawkish and we still expect further interest rate hikes.

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