Central bankers in Russia and Turkey have had a lot on their plates recently, with the former facing an unexpected external shock and the day of reckoning for accumulated imbalances coming due for the latter. The initial reactions of both were convincing textbook policy tightening, and now the question is whether more of this is needed or whether thoughts need to turn to policy normalisation. Milder external conditions make additional tightening unnecessary at the current juncture, but the stagflationary macroeconomic backdrop makes policy normalisation a distant prospect, although the domestic political agenda might divert regulators from an orthodox course of action.
In Russia, the short-term growth story is that of reaction to the uncertainty shock, and while companies seem to have been holding off capex, households increased non-food spending in anticipation of FX-fuelled price hikes amid and thus helped to smooth the slowdown in 1Q14. Meanwhile, broadening FX pass-through and several idiosyncratic shocks on the food market (dairy, pork) are pushing inflation higher, to 7.2-7.3% YoY in April. Hence, the CBR looks set to preserve its hawkish rhetoric and remain in its wait and see stance for a while, especially as geopolitical tensions look far from resolved at this stage. Policy normalisation is unlikely to come to the agenda before late 3Q14, when inflation could well subside and there might be more visibility on the external front.
As for the Turkey, our strategist Akin Tuzun believes there is a possibility of a 50bp rate cut this week, but it will be premature amid elevated inflationary pressures and might raise concerns over the independence of the central bank.