TOPIC OF THE WEEK: Diverging impulses in monetary policies across CCA
This week brought three rate decisions in the CCA, including Armenia, Georgia and Uzbekistan. They demonstrate that, while the broader easing momentum in the region continues, policymakers take a different view on how underlying macroeconomic conditions affect the path for policy rates.
Indeed, the greatest divergence in policy messages comes from the two solid inflation-targeting countries in the South Caucasus, Armenia and Georgia. While both have by now eased policy by more than 200bpts in this cutting cycle, individual policymakers appear to differ in their assessment of the possible intensity and persistence of future rate decreases. In Armenia, the central bank still sees a positive, if declining, output gap, which argues for a more cautious approach to possible future rate cuts. The Governor has also explicitly argued that the refinancing rate is now approaching its neutral level, which imparts additional circumspection in central bank’s actions. In contrast, and despite larger cumulative cuts, the NBG has delivered a distinctly dovish message, underlining the sustained low inflation environment. Uzbekistan has the highest inflation in the CCA and it will also be the only country that will not have its price growth within its CPI target this year. Hence, unsurprisingly, policymakers have been keeping the policy rate unchanged for more than a year now, although the (very) gradual decline in inflation and inflation expectations may warrant a rate cut this year.
In conclusion, we stick to our forecasts for end-2024 policy rates in Armenia (8.00% vs 8.50% now) and Uzbekistan (13.0% vs 14.0% now) but see some downside risks in Georgia, where we currently anticipate the year-end refinancing rate at 8.00% (8.25% now).
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