TOPIC OF THE WEEK: Policy rates—higher for longer?
The unfolding of the Iran crisis and the attendant inflation shock has changed the way central banks in the region have been assessing risks and acting upon them. Kyrgyzstan was tightening even before the onset of the crisis, but Georgia (in May) and Armenia (last week) also raised policy rates, while Uzbekistan has been prevented from cutting (in a meaningful way) as I had anticipated at the start of the year.
I try to capture these pangs of monetary conscience by constructing a heat map and an inflation pressure score index that combines, as a weighted average, inflation and demand indicators, adjusted for the level of existing policy restraint. A higher index value, calculated on a scale of 0 to 100, suggests greater necessity of maintaining, or even tightening, monetary policy. Vice versa, a lower index value indicates less pressure to resist easing.
The index shows the strongest tightening pressure in Kyrgyzstan, but my 3–6 month base case remains a "hold" across the region. Kyrgyzstan records by far the highest inflation-policy pressure score (86.25), reflecting strong inflation and demand pressures. Tajikistan (53.13) and Uzbekistan (52.50) seem to warrant holding rates, with Tajikistan’s modest output gap tempering its rapid wage and investment growth, and Uzbekistan’s existing restraint offsetting firmer underlying pressures. Georgia (44.38) and Armenia (43.75) also favor cautious holds, as inflation risks limit the case for easing. Azerbaijan (36.88) comes in at the bottom and demonstrates the least pressure against easing, although high inflation persistence also argues for patience.
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