TOPIC OF THE WEEK: Cautious easing to continue in 2024
With Uzbekistan opening up the monetary policy season in the Caucasus and Central Asia on Jan 25 by keeping its key rate unchanged, we delve into our views about how central banks will conduct their rates policy this year.
While average CCA inflation peaked around mid-2022, the uncertainty surrounding existing inflation risks generated a policy environment in which central banks intentionally responded cautiously to the downtrend in price growth and continued maintaining high nominal policy rates for another half year. As a result, the average CCA policy rate only peaked in Jan 2023, at 11.7 percent, before gradually coming down to 10.2 percent by the end of the year.
The combination of a rapid decline in inflation since mid-2022 and the desire to err on the side of caution in lowering policy rates has now created a backdrop in which real policy rates have shot up to historical highs. Indeed, while real rates were still hovering around zero by the third quarter of 2022, they have now soared to 7.3 percent, the highest level in more than a decade.
Despite the implied tightness of monetary policy, we think that policymakers will persist in a gradual approach to further monetary policy easing. This cautious approach will also be driven by the fact that, while inflation remains relatively well-behaved, it will still hover around CPI targets, thus making it possible for a variety of shocks to endanger price stability. As a result, we see average CCA policy rates edging down to 9.5 percent by the end of the year. This baseline scenario encompasses a wide distribution of individual country cases, with Georgia implementing the deepest cuts and Tajikistan actually hiking.
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