TOPIC OF THE WEEK: Rate monotony is the base case across the CCA in 2026, with a handful of compelling exceptions
I have discussed on a number of occasions the analytical framework I employ to think about currencies in the CCA region, so I now turn to the rates space. I use three simple quantitative models in an attempt to pin down the proper stance of monetary policy in each individual country. I then proceed to infer in which direction policy rates might evolve in the coming months.
The results indicate that the policy stance can then be characterized as unambiguously tight in the case of Uzbekistan and unambiguously neutral in the case of Armenia. There is more variability in the way monetary policy can be assessed in the rest of the countries. For Azerbaijan and Georgia, neutral-to-tight policy seems to better capture the policy stance, while in the Tajikistan neutral to easy would be the preferred description. Kyrgyzstan is the hardest to pin down.
From a market perspective, I find the cases of Uzbekistan and Kyrgyzstan the most interesting. In the former, the totality of underlying factors would be consistent with a more forceful downward move in policy rates this year, and anything around a 200bps rate cut would seem warranted this year. The latter is intriguing, including because this is the only country in the CCA where one can reasonably claim that the economy is overheating. The NBK has correctly upped the ante in recent months, and a further hike may follow at the end of this month. However, headline inflation appears to have already peaked, and the large increase in the policy rate over the last couple of months may create an environment for some easing into the end of the year.
For the rest of the countries, I see a tight range for the policy rate, between 6 and 8 percent, corresponding to the broadly neutral stance of their monetary policies. In Armenia, Azerbaijan, Georgia and Tajikistan, the quantitative framework largely suggests little obvious direction for policymakers, although a cut would be more likely in the case of Georgia and Azerbaijan than in the case of Armenia, given that the latter has already eased quite aggressively over the last couple of years. Tajikistan, on the other hand, may be more likely to hike than ease given expectations that the CPI could face some tailwinds. In any case, I expect policy rates in these four economies to remain in a very tight range this year.
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