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Is Russia Market Unrest Ruining CEE Central Banks Effort?

EM FX
  • Last year, the significant rise in inflationary pressures have resulted in aggressive hikes by EM central banks (CEEMEA/ Latam).
  • Policymakers have not hesitated to surprise market participants by raising the policy rates more than expected proceed with up to 200bps hikes.
  • Most of the effort done by EM policymakers was to limit the downside risk in the domestic currency as a depreciating currency keeps supporting inflation expectations.
  • Even though EM currencies were starting to consolidate sharply higher in the beginning of January, the recent political tensions with Russia have triggered a risk off environment, leading to a significant sell off in risky assets and pushing preference for ‘safe’ assets such as the US Dollar.
  • Selling pressure on EM FX has been elevated, with CEE currencies losing more than half of their early January gains.
  • Even though the probability of a Russian incursion is low, a prolonged period of uncertainty puts CEE policymakers in a difficult position as a constant depreciation of the domestic currencies would continue to support inflation expectations (‘public enemy’ for some policymakers).
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