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CEEMEA Weekly Summary - 4 June 2014

Core Content Overview

This report provides an analysis of economic developments and monetary policy trends in Central and Eastern Europe (CEEE) and South Africa, with a focus on inflation expectations, interest rate decisions, and structural economic challenges.

Key Themes and Countries

Poland: Strong Consumption to Fuel Inflation in 2015

• GDP Growth: Poland experienced strong real and nominal GDP growth in Q1 2014, reaching 3.4% y/y real and 5% y/y nominal.
• Monetary Policy: The National Bank of Poland (NBP) left interest rates unchanged, but its post-meeting comments were dovish. It may consider rate cuts in Q4 2014 if deflationary risks persist.
• Inflation Outlook: Inflation is expected to rise in 2015 due to increased domestic demand and higher food prices, with the output gap likely to close by mid-2015.
• Labour Market: Employment growth reached 1.8% y/y in Q1 2014, the fastest since 2008, suggesting a potential 5% y/y increase in nominal wages by Q3 2014.
• Consumer Spending: Real income growth is expected to boost private consumption from 2.6% y/y in Q1 to over 3% y/y in the coming months, despite inflationary pressures.
• Monetary Tightening: The NBP is expected to start tightening monetary policy by mid-2015, with the central bank target for CPI inflation at 2.5%.

South Africa: The Rules Have Changed

• Taylor Rule Analysis: A Taylor rule-based assessment indicates that South Africa's monetary policy has been more accommodative than the rule would suggest, with a policy-rate deviation of -4.0pp.
• Interest Rate Outlook: The report forecasts a 150bp increase in interest rates over the next 18 months, with 50-75bp expected by the end of 2014.
• Inflation and Output Gap: The current inflation rate is 5.5%, and the output gap is estimated at 3.0% (below official estimates of 3.5%).
• Economic Slack: The SARB is more sensitive to economic slack, leading to a more measured and slower reaction to inflation compared to the Taylor rule.
• Currency Vulnerability: South Africa's real interest rates are the lowest among emerging-market peers, and failure to raise rates could make the ZAR more vulnerable, especially as other economies normalize monetary policy.
• Political Impact: The report highlights the potential for monetary policy to be influenced by political factors, such as the government's focus on improving its image.

Key Economic Indicators and Trends

• ECB Policy Meeting: Expected to announce rate cuts (likely 10bp in both refi and depo rates) and measures to boost bank lending, possibly including a new Long-Term Refinancing Operation (LTRO).
• Turkish Inflation: Headline inflation in Turkey reached 9.7% y/y in May, but the Central Bank of the Republic of Turkey (CBRT) may still ease policy if market conditions allow. The report forecasts 8.2% year-end inflation.
• South African Manufacturing and Mining: Manufacturing PMI fell further into negative territory in May, and mining production is expected to continue in negative growth due to the ongoing platinum-sector strike.
• Current Account Deficit: The current account deficit is forecasted to narrow by USD 3.4bn to USD 56.6bn in April, supported by improved gold trade and net exports.
• Policy Rate Deviations: South Africa's policy rates are significantly below the Taylor rule's implied rates, suggesting a more accommodative stance than warranted by economic fundamentals.

Key Concerns and Outlook

• Poland's Inflation Drivers: Domestic demand and private consumption are expected to drive inflation in 2015, despite current low inflationary pressure.
• South Africa's Structural Challenges: Economic slack and infrastructural constraints are limiting the SARB's ability to raise rates, but the low real policy rate relative to peers is a concern.
• Monetary Policy Normalization: The report notes that the ECB and other developed economies are moving towards normalization, which may pressure the SARB to act sooner rather than later.
• Political Influence on Policy: South African politics is influencing the central bank's stance, with the government's focus on image and public perception affecting policy decisions.

Summary of Key Data and Forecasts

Conclusion

The report highlights divergent monetary policy paths across the CEEMEA region, with Poland and South Africa being key focus areas. Poland's economy is showing signs of recovery, driven by domestic demand, and is expected to face inflationary pressures in 2015, prompting potential rate hikes. South Africa, on the other hand, is struggling with weak economic data and a low real interest rate, which may force the SARB to increase rates to protect the ZAR. The ECB is expected to implement further easing measures, while Turkey faces high inflation despite political pressure for rate cuts. Political dynamics in South Africa are also influencing the central bank's decisions, adding complexity to the monetary policy environment.