TOPIC OF THE WEEK: Has disinflation run its course?
While inflation in the Caucasus and Central is still heading lower, we investigate the factors that may change the current direction of price growth. While there are forces that would drive inflation in diverging directions, we see those that are keeping price growth in check prevailing in the months to come. The still favorable base, suppressed growth dynamics and deflationary PPI impulses from China, and tight monetary in the region would, in our view, outweigh the more robust price pressures deriving from Russia and the expectations of modestly weaker currencies, at least in the short term.
Indeed, central banks in Armenia, Georgia and Tajikistan have already met their CPI targets, with those in Azerbaijan and Uzbekistan expected to achieve this feat in 2024 and 2025, respectively, as their inflation prints gradually approach the CPI targets from above. While we see inflation having already reached a bottom in the case of Armenia, Georgia and Tajikistan, thus promising to start inching up over the second half of the year, this will only ensure that in those three economies price growth will again approach the CPI targets sometime next year, but only from below.
We also develop three approaches to judging the monetary policy stance in the region.The three methods mostly agree on individual policy stance and argue that tight monetary policy has also supported the broader decline in inflation. The policy stance can then be characterized as unambiguously tight in the case of Armenia, Georgia, and Uzbekistan, tight to neutral in the case of Tajikistan, and neutral in the case of Azerbaijan.
Our analysis can also be used to calculate the cumulative cuts needed to bring the policy rates to their respective equilibrium level according to each of the three employed methodologies. We can then average over them to see how much monetary authorities may need to adjust policy in this policy cycle. We find there are significant implied cuts in the case of Armenia, Georgia and Uzbekistan, smaller ones in the case of Tajikistan and no cuts needed in the case of Azerbaijan. Of course, these are only very indicative calculations, but in any case they are useful in playing a part in forming our expert judgment on the quantitative direction of monetary policy.
Now read on...
Register to sample a report