Emerging Europe Central Banking: What To Expect In 2014
BMI View: Amidst clear signs of a domestic demand recovery, monetary authorities in central Europe will face a delicate balancing act in 2014 as they seek to support growth, unwind unprecedented loose policy, and contain incipient inflationary pressures. Turkey and Russia, on the other hand, will face weakening growth prospects and still-elevated inflation.
Following a year in which interest rates in emerging Europe were cut to historic lows to stimulate weak domestic demand and defend against unwanted currency appreciation, we expect loose monetary policy to persist through much of 2014. With the exception of Turkey, emerging European financial markets were relatively unscathed by rising US Treasury yields in 2013 when compared to emerging market peers in Latin America and Asia ( see 'Central European Banks Look Strongest' January 16), and instead remain tightly integrated with western European markets, where falling inflation and the prospect of further monetary easing has kept a lid on borrowing costs.
Therefore, idiosyncratic trajectories of consumer price inflation and domestic demand growth will determine the course of monetary policy in the region in 2014. In Poland and the Czech Republic, where we believe the rate cutting cycle has already come to end, monetary authorities will face a delicate balance between countering the build-up of demand-side price pressures and supporting nascent economic recoveries. In contrast, benign inflation dynamics will provide scope for further rate cuts in Hungary and Romania, although both countries remain the most vulnerable to FX depreciation and a rapid rise in headline price growth. Turkey and Russia face a unique set of challenges, and the former will struggle to avoid stagflation in 2014 as growth slows and core inflation rises.
|Not Following USTs Higher|
|US & Central Europe Benchmark 10-Year Local Currency Bond Yield, %, rebased to Jan-2013=100|