At the end of spring, the divergence in manufacturing performance between CEE3 and the rest of our CEEMEA universe might have cemented with Poland, the Czech Republic and Hungary continuing to benefit from the ongoing recovery in Germany (the Eurozone flash PMI estimate for May was the second-strongest of the past three years) and some relief to the Ukraine crisis, while lingering internal rebalancing in Russia and Turkey (read deteriorating local demand) is keeping a lid on production.
Thus as an inflationless rebound in Poland is admittedly underway, we see little grounds to expect any deviations from the central bank guidance to maintain rates at their current levels at least until the end of 3Q14. At the same time, given tangible risks of deflation (and an entrenched period of below-target CPI growth) we might see more dovish rhetoric and even an extension of its policy guidance.
In Russia, as opposed to deflation scenarios in Europe, inflation is gathering pace, fuelled by food shocks and the FX pass-through impact on core items. We expect a 0.9-1.0% MoM increase in CPI, implying 7.6-7.7% in YoY terms. Looking beyond May, sharp and persistent shocks on the pork/meat market might continue to push headline CPI to a peak of 7.8-8.0% YoY by the middle of June, which will present the CBR with another difficult decision at its next meeting on 16 June. Looking into 2H14, we still expect inflation to moderate starting in July on tariffs, the base effect, a fading FX pass-through, and demand-pull disinflation.