Region leading the EM central bank policy shift

Emerging Europe has been at the heart of the shift in EM monetary policy over the past month, with central banks in Russia, Turkey and Ukraine raising interest rates in March. The triggers for tightening were largely home grown in nature, including a surge in inflation in Russia and Ukraine and Turkey’s attempt (now undermined) to improve its credibility and tackle inflation, rather than a reaction to the global bond market sell-off. Further interest rate hikes are likely to be front-loaded in Russia and Ukraine to tame inflation. Meanwhile, central banks in Hungary and Romania sounded more cautious about the inflation outlook and we no longer expect interest rate cuts there this year. The exception was Poland’s central bank, which sent a clear message that it is willing to keep policy loose for some time to support the recovery.