pace globally. CEE is part of that. Poland has joined Hungary and
Serbia in hiking rates. Kazakhstan last week issued its 2011 monetary
policy guidelines, taking a hawkish tone while comments from CBR First
Deputy Chairman Alexei Ulyakaev signaled concern about the rise in
inflation. This week, inflation is likely to remain at the forefront
as the first inflation releases for January in the region (Kazakhstan
on Tuesday, Turkey on Wednesday) begin to filter through. From a
regional average of 3.7% for 1H10, inflation in YoY terms had
increased to 5.5% by December. From an average of 0.9% YoY over 1H,
food price inflation in the region rose to 7.1% YoY by December,
punching well above its weight in CPI baskets. By December, food price
inflation was sufficient to absorb 45%, 43%, 54%, 38%, 67%, 49% and
86% of inflation targets in the Czech Republic, Hungary, Kazakhstan,
Poland, Romania, Russia and Serbia, respectively. Turkey was more of
an outlier, with food prices accounting for 31% of the inflation
target, just marginally above its 28% weight. Further increases in
food price inflation over the coming months seem unavoidable at this
stage given the continued increase in global food prices. On a
12-month horizon, it is much more difficult to generate a scenario
whereby food price inflation does not decline – to do so would
require a further decline in food production in the region relative to
last year's poor harvest as well as a further 40% + increase in global
food prices. Policy makers must not only consider the impact of higher
food (and energy) prices on inflation but also on economic activity.
This year is the first year in 4 that all 17 countries in our coverage
will post gains in economic activity but the resilience of the
recovery and the extent to which it is broad-based in nature varies
significantly within the region. For some countries at this stage the
recovery remains one which is heavily reliant on external demand, e.g.
Hungary, Czech Republic, Romania. For others, the recovery is more
broad based, either because the authorities had sufficient ammunition
to support domestic demand (e.g. Russia, Kazakhstan) or because the
private sector has relatively easy access to funding (e.g. Poland,
Turkey). A quick glance at labor market performance also paints a
mixed picture for the region. In some cases unemployment is clearly on
a downward trend, e.g. Turkey, Russia, Kazakhstan. In others,
unemployment has peaked, at least tentatively but has yet to show a
significant decline, e.g. Czech, Hungary, Poland, Romania. Bulgaria
and Croatia are two countries where unemployment has yet to show firm
signs of peaking out. The case for a tightening of monetary conditions
seems strong in countries in Turkey and Russia but less so in
countries such as the Czech Republic. In Poland and Hungary, fiscal
performance could prove a more important determinant.
Source: Fxstreet.com
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