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Macro week ahead – CBR caught between a rock and a hard place


The CBR meets this Friday to discuss monetary policy. This week also offers a blend of economic data reports, among which we highlight the CPI reports for August in Hungary and the Czech Republic, as well as the first estimate of economic growth for 2Q14 in Turkey. Meanwhile, the regular weekly inflation release in Russia might be worth watching.

Against that backdrop, at the end of this week there is to be a three-way meeting of officials from Ukraine, Russia and the OSCE for further negotiations after the ceasefire agreement (which contains 12 points, including prisoner swaps, pulling back troops and creating a buffer zone on the Russian-Ukrainian border) was signed last Friday.

While geopolitical news will likely continue to hit traders' screens, all eyes are to be on Russia’s central bank policy meeting on 12 September. The consensus is for no change in its policy settings. However, the possibility does exist that it might deliver a hike and sound a somewhat less hawkish note at the press conference following the interest rate announcement, foreshadowing a further policy status quo. That said, the political room for additional tightening is not far from exhausted and the CBR already seems to have started softening its ultra-hawkish language. Nevertheless, we believe the regulator might be concerned about damage to its credibility if it fails to act after explicitly threatening to lift rates if inflationary risks materialise – especially so in light of the looming upward revision to its own inflation forecasts. To sum up, although we continue to see little fundamental reason for additional tightening, the credibility rationale might prevail and the CBR could finish the tightening cycle with another 50bp hike this Friday, we believe.

The latest inflation reports, for the month of August in both Hungary and the Czech Republic, are to be closely watched as well. No surprises are expected, just near zero readings, although inflation in the Czech Republic has recently started to point to a tepid acceleration on the back of a weakening koruna and a general recovery.

On Wednesday, the 2Q14 GDP print in Turkey will help to provide a clearer picture on the speed and momentum of activity following the flat performance (near 4.3-4.5% YoY) seen in the previous quarters. The domestic and external financial conditions are quite severe and elevated inflation contains purchasing power, with domestic demand likely to be more modest than last year. At the same time, Turkey's exports might become a key growth engine as a weaker lira would help local producers to compete on the global scene. That said, more a eduction in political instability, as well as improved foreign demand and global EM-sentiment, could boost Turkey's growth, though it is not our base case yet which implies a gradual slowdown to around 2.5% YoY in 1H15.

Lastly, midweek is to see the release of the latest weekly inflation report in Russia that could hint at how vivid an inflationary effect of the food ban is so far.

Daria Isakova, Vladimir Kolychev
VTB Capital analyst


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