Rising inflation in Emerging Europe poses dilemma for central banks

Rising inflation in Emerging Europe poses dilemma for central banks
Inflation has remained elevated in Central and Southeastern Europe. / Erste Bank
By bne IntelliNews March 17, 2021

Inflation has been rising across much of Emerging Europe and Eurasia, pushed by commodity and food prices. Now with economies primed to rebound as pandemic restrictions are loosened, consumer prices could rise even higher, reawakening an issue that had long been ignored.

Unlike Western Europe, most of Emerging Europe has left deflation well behind it.

“The setback in inflation or the “deflationary shock” in 2020 in all our countries in CEE had not been as strong as in Western Europe (with a few exceptions like Bosnia or Croatia),” says Gunter Deuber, chief economist of RBI. “Therefore, the reflation we are seeing across the region and in Western markets is taking place from a much higher starting point in some places.”

How serious the inflation challenge will turn out to be will depend on many variables, including on how fast pandemic restrictions are lifted, how much pent-up demand consumers really have, and how quickly governments withdraw their support packages. In some countries, notably the Czech Republic, the labour market has remained tight despite the pandemic, and wages could start to rise fast again soon.

If inflation – and inflationary expectations - become a problem again, the question then will be how fast the region’s central banks will move to raise rates, given that their economies are still fragile after the pandemic.

“The peak in HICP inflation will likely be reached in April-May 2021 and could become a headache for central bankers, especially when coupled with strong double-digit growth of retail sales and industrial production,” said a recent research report by Erste Bank.

Meanwhile, speculation over a potential rise in US Federal Reserve rates is already causing a mild version of a ‘taper tantrum’ in emerging markets and pushing bond yields up. Investors have began to dump EM assets, with cross-border portfolio flows turning negative in the first week of March for the first time since October, according to the IIF. The benchmark JPMorgan indices for local currency and foreign currency EM bonds have both fallen sharply over the past month, bringing losses this year to about 5 per cent, according to the Financial Times.

Some central banks in countries with high inflation and weak currencies – such as Turkey, Ukraine and Russia – may have little choice but to hike rates. Other likely candidates are seen as economies with tight labour markets such as Czechia.

But the tough stance of the ECB may give other countries in Central and Southeastern Europe some breathing space.

“The ultra-strong determination of the ECB to cap benchmark yields in Europe gives markets like Czechia, Poland a certain relief from a benchmark yield perspective, while this also increases the attractiveness for European investors to look for EM Europe exposure in EU countries; the improving fundamentals and solid external positions in case of Hungary or Romania shall anchor investor appetite here,” says Deuber.

Below, bne IntelliNews reporters across Emerging Europe look at how inflation is developing in their countries and the outlook for interest rates.


• Russia

PAST TRENDS: After decades of double-digit inflation, the increase in prices fell into single digits for the first time in 2007, and inflation continued to fall to finally reach a post-Soviet low of 2.8% in January 2020 – an inflation rate on a par with  a “normal” country.

CURRENT TRENDS: The COVID-19 crisis has undone the progress in fighting inflation, which started to rise again in April last year when Russia’s economy was hit by the double whammy of collapsing oil prices and a ruble devaluation. Inflation accelerated sharply at the start of this year, rising to a  four-year high of 5.7% year-on-year.

OUTLOOK: Inflation is expected to stay higher this year but should start falling soon. Some analysts say inflation peaked in February, but others that it will rise a little more in the coming month before the devaluation effects dissipate and the summer gardening season brings food prices down again.

The CBR is predicting an average inflation rate of 4.2% to 4.8% this year, but an end-of-year result of 4%, before falling to 3.6% by the end of the following year.

With the reappearance of ballooning prices the CBR is under pressure to hike rates. CBR governor Elvira Nabiullina has already said that there will be no more rate cuts for the meantime and analysts are speculating that there is a rising chance for a small rate cut this month or next, up from the current 4.25% overnight rate. The CBR also sees the chance for more hikes in 2022 to 5% as the economy heats up as growth gathers momentum.

• Ukraine 

PAST TRENDS: The Revolution of Dignity in 2014 caused a massive economic dislocation and it has taken years for the Ukrainian  economy to recover. The deep devaluation of the hrynia caused inflation to spike and the National Bank of Ukraine (NBU) to hike rates to 18% at the middle of 2018, when inflation started to rise again after several years of decline.

CURRENT TRENDS: The drastic action paid off and in the last two years the NBU not only controlled inflation, it crushed it. Inflation continued to fall after the last rate hike to reach a post-Soviet low of only 1.7% in May 2020, which in turn allowed the regulator to make a series of 100 point-plus rate cuts over the course of the last two years.

OUTLOOK: However, by the start of this year inflation was back, driven by rising food prices and the feed through from yet another devaluation. Inflation had risen to 7.5% by February this year, forcing the NBU to hike rates by 50bp at its March meeting to 6.5% – the first Eastern European country to pull the rate-hike trigger.

The NBU expects inflation to peak in the middle of 2021. Then it should start cooling, and it will return to the target rate in 1H22 of 5% plus/minus 1pp. However, with inflationary pressures still high, analysts in Kyiv are predicting another 100bp rate hike at the April 15 monetary policy meeting.

• Belarus 

PAST TRENDS: In the tightly controlled state-run economy, inflation hasn't been a major problem for Belarus since it fell into single digits at the start of 2017, but it has remained uncomfortably high at between 4% and 6% for the last few years. However, at the end of 2020 the inflationary pressures that have been doing the rounds hit Belarus too, which finished the year with 7.4% inflation in December – its highest level in almost four years.

CURRENT TRENDS: Inflation stepped up again in January to 7.7%, however, inexplicitly the rate dropped to 3.1% in February, according to the state statistics committee. Food prices were the main driver, but those were up a modest 3.3% and services by 3.7%.

OUTLOOK: The outlook for this year remains very uncertain, as Belarus is in the midst of its worst political crisis in 26 years and it has been cut off from all funding other than what Russia gives it. The central bank has been cutting rates continuously for the last five years, but as global inflationary pressures rise the bank postponed its January rates meeting, leaving rates at 7.75%, because it wanted to “undertake an additional analysis into the projected consumer price growth and exposure to the key factors that accelerated the consumer price growth”. It left the rates on hold at its March 12 meeting too.  The bank went on to cancel all the future meetings this year, which will only be held “when necessary,” the National Bank of the Republic of Belarus (NBRB) sad.


• Poland

PAST TRENDS: Poland's inflation kicked off 2020 with the highest growth in years, with CPI growth well exceeding 4% y/y in January through March, owing mainly to more expensive energy. Price growth eased later in the year but remained fairly elevated – compared to 2019 and before – at around 3% y/y until December.

CURRENT TRENDS: Polish CPI grew 2.4% y/y in February, the annual growth rate easing 0.2pp versus the revised annual reading the preceding month, the statistical office GUS said in a preliminary estimate on March 15. In monthly terms, CPI expanded 0.5% in February, a slowdown after expanding just 1.3% on the month in January, GUS data also show.

“Inflation fell below the NBP target but, in our opinion, it will not stay there long. The fall was driven by non-basic categories: a decline in prices of energy, slower growth in fuel and food prices,” PKO BP noted.

OUTLOOK: Inflation likely reached bottom in February and is now expected to climb up towards the upper range of the central bank’s deviation band from the inflation target, analysts say. 

“Inflation likely bottomed out in February and should gradually begin to increase in coming months and move in the upper bound of the central bank’s inflation target. The base effect from fuel prices’ collapse last year will likely push headline figure up in April-May 2021,” Erste said in a comment.

“We see headline CPI on average at 3% in 2021. Despite increased inflation throughout the year, we expect the National Bank of Poland to remain on hold at least until the end of Governor’s Glapinski term in mid-2022 and likely until the end of next year,” the Austrian bank added.

• Czechia

PAST TRENDS: The average inflation rate in Czechia for 2020 amounted to about 3.2%, which is the highest rate since 2012 when it reached 3.3%, driven mainly by growth in food and housing prices. In 2019, the Czech average inflation rate stood at about 2.86% year-on-year. 

CURRENT TRENDS: This year, the annual growth of Czech inflation rate slowed down, in March standing at its lowest level (2.1%) since the end of 2018.

OUTLOOK: However, due to the recent increase in commodity prices, CPI is not likely to slow in 2021 as quickly as expected in the inflationary outlooks. 

As stressed by ING Chief Economist Jakub Seidler, uncertainty is stemming from both the ongoing coronavirus crisis and the new fiscal package introduced, which will most likely be pro-inflationary. ING expects the inflation rate to stand at 2.3% in 2021. 

The Czech central bank (CNB) forecasts Czech inflation rate to slow to levels close to the 2% target in 1Q21 and fluctuate around the target for the rest of this year. A decrease in core inflation in 1H21 will reflect a continued weakening of growth in total costs, the CNB said, adding that the disinflationary effect of the domestic economy will subsequently fade steadily as the country gradually recovers from the pandemic, while the appreciation of the Czech crown is likely to act in the opposite direction. As for the next year, CNB expects the inflation rate to get above its inflation target, mainly due to the growth in excise duties. 

Analysts speculate that the CNB will begin raising rates again in H2. "The Czech National Bank remains the most hawkish in the region and we expect the CNB to deliver the first 25bpinterest rate hike in Novembe 2021, due to rising inflationary pressure," Erste said in a recent report."

• Hungary

PAST TRENDS: The pandemic hit the Hungarian economy when its fundamentals were stable, and growth was one of the highest in Europe. Hungary’s economy had been in high-pressure phase since 2017 with strong wage and output growth, thanks to coordinated steps by the government and the central bank, which continued its ultra-lose monetary policy even as inflation was close to over the upper threshold of the 4% mid-term inflation target during several months in 2019. Headline inflation ranged between 2.7% and 4% in 2019 and spiked to a seven-year high in January 2020 at 4.7%, lifted by higher fuel and food prices and an increase in excise tax on tobacco. It stayed over the 4% threshold in 2020 for just a month, when the crisis hit. Headline inflation spiked to 3.8% in July and 3.9%, the highest within the EU due to the reopening of the economy.

CURRENT TRENDS: Hungary’s headline inflation rose to 3.1% in February, accelerating from 2.7% in January, lifted by higher fuel and tobacco prices, according to figures from the Central Statistics Office (KSH) on March 9.

OUTLOOK: Analysts and the central bank expect high volatility in CPI this year. Inflation may peak at 4-5% in the spring months before returning to below the central bank's 4% target. 

The MNB expects the headline data to be 3.5-3.6% before returning to around the central bank target of 3% in 2022. Inflationary pressures may rise once again in the summer months after the reopening of the economy and if the forint’s weakness continues. Overall inflation was likely to be 3.5-3.6% in 2021.

There is consensus that the MNB will first raise the one-week deposit tool from 0.75% if the EUR/HUF rate comes close to its all-time low of 370. Analysts are not expecting the central bank to raise the benchmark 0.6% base rate any time before 2022. 

• Slovakia 

PAST TRENDS: In the past two years, Slovakia's inflation rate was the highest across the euro zone. In 2019, the country reported an inflation rate of 2.7%, while in 2020 CPI dropped to 1.9%. In December 2020,  the growth of consumer prices stood at 1.6%, posting the third lowest figure since 2018, as oil prices rose on the global market, and amid expectations that the pandemic will soon ease and a robust recovery in global demand is ahead. 

CURRENT TRENDS: This year, Slovakia's inflation rate started with a drop to 0.7%, followed by a slight increase to 0.9% in February, driven chiefly by growth in prices of fuels, alcohol and tobacco. 

OUTLOOK: Wood & Company analyst Eva Sadovska expects Slovakia´s annual inflation to gradually get over 1% and come close to 2% in 2H21. The Erste Bank forecast for 2021 sees CPI growth slowing down to 0.9% on average, as domestic price pressures are gradually easing, following the cooler economic environment and lower energy prices. They expect prices to grow in line with the expected economic recovery in 2H21.

In its Macroeconomic Forecast, the Slovak Finance Ministry forecasts inflation to reach 1.2% in 2021, followed by 2.2% a year later, while the European Commission expects the deteriorating near-term outlook of the inflation rate in Slovakia to act as an additional disinflationary force via weaker domestic demand, leading to an annual inflation rate at 0.5% in 2021. In 2H21, rising prices in the domestic service sector are expected to push inflation rates up to reach 1.6% in 2022.  

• Baltics

PAST TRENDS: The Baltics’ economic activity has so far been fairly resilient to the impact of COVID-19. Although some businesses were hit by the pandemic particularly hard, an even deeper economic downturn was avoided due to relatively strong manufacturing activity, increased net exports and government support measures that helped firms preserve most jobs. Deflation was experienced at times in 2020 in Estonia, while inflation for the whole year was just 0.6%.

CURRENT TRENDS: Lithuania posted 0.8% annual HICP inflation for January. Estonia saw annual inflation at 0.3% in January, a -1.3% y/y drop against +0.9% for the euro area and +1.2% for the European Union on average. Estonia’s Central Bank said in early March that inflation of 0.6% in February was mainly driven by energy prices, as price rises in the rest of the consumer basket remained slow. Latvia’s annual inflation stood at -0.5% for January.

OUTLOOK: Lithuania’s central bank said at the end of 2020 that inflation is not projected to increase over the next year, averaging around 1.1% in 2021.  Swedbank Lithuania said, however, in late January that inflation in Lithuania will rise to 2% this year and will accelerate further to over 3% in 2022.

Latvia’s central bank, Latvijas Banka, has recently revised the inflation rate, to 1.1% for 2021, down 0.3% from the September 2020 projection. The bank assesses inflation to be under 1.5% in 2022. 

Eesti Pank, Estonia’s central bank, forecasts that inflation for 2021 will be 1.4%. Swedbank Estonia said in late February that inflation will increase to 1.3% this year and to 1.7% in 2022.


• Turkey

PAST TRENDS: Turkey is something of an outlier, having lurched from a balance of payments crisis in August 2018 to almost another balance of payments crisis in late 2020—at which point, the Erdogan administration took the “bitter pill” and gave up its approach of keeping interest rates low despite the high inflation. The central bank has since hiked its benchmark rate by 675 bp. Inflation, however, has stubbornly inched up, rising to 15.61% in February from 14.97% in January. With Turkey, also bear in mind that the official inflation figures are widely doubted—the work of the Inflation Research Group (ENAG), led by Istanbul academics, indicates Turkish inflation is at least twice as high as officials say it is.

CURRENT TRENDS: The USD/Turkish lira (TRY) rate plays a fundamental role in Turkey’s real inflation as the country’s economy is dependent on imports, particularly oil and gas. All commodity prices have recently been booming on supply shortages and financial speculation. That is feeding into Turkey’s already high inflation rate.  

OUTLOOK: Ankara’s new economic team has given a guarantee to markets that it will fight price growth and, taking into account the perilous condition of the economy, the central bank is expected to tighten the key rate at a meeting on March 18. The market is demanding a minimum of 100bp. If the central bank were to fall short on March 18, Turkey’s lira and markets would definitely feel gravity. On the other hand, some tightening will not assure stability until the current global market shake-up ends.

The earliest chance Turkish officials will have to make the case that inflation, based on official data series, has switched to a declining trend will likely come in May. Current market expectations suggest an end-2021 official inflation rate of over 10% in Turkey. The central bank has a 9.4% target.

• Romania 

PAST TRENDS: Consumer price inflation in Romania has converged steadily over the past two decades, moving from rates of 30-40% in 2000-2001 to single-digit rates starting in 2005, to eventually stabilise within the 0-5% band since 2011. A VAT rate cut for food in July 2015, at a time of sluggish economic growth, pushed down the annual inflation rate to below zero. But the consumption-driven growth encouraged by the Social Democrats through aggressive fiscal and income policies in 2016-2018 pushed up prices and raised the inflation rate above 5% for a couple of years. The more sustainable policies of the Liberal government that followed in 2019 and the unusual developments in 2020 — low energy prices, moderate demand and credit during the pandemic — put inflation back on a downward track.


CURRENT TRENDS: Romania’s refinancing rate is currently at 1.25%. The inflation rate rose again to 3.2% y/y in February, at the higher end of the target band of 2.5% (+/-1.0pp), up from a low of 2.1% in November, but this was mainly the effect of the electricity market liberalisation that came into effect in January. The effect of the permanent rise in electricity prices is seen by the central bank as transitory. 

The annual adjusted CORE2 inflation rate continued to decrease slowly over this period, falling to 3.1% in January and staying at this level in February, from 3.3% in December 2020. However, the series of four rate cuts over the past year, which brought the refinancing rate to 1.25%, will likely be discontinued.

OUTLOOK: The National Bank of Romania’s (BNR’s) new scenario shows a change in the inflation outlook versus the previous projection, as the updated path of the forecast annual inflation rate is revised significantly upwards in the short term and to a smaller extent over the second part of the projection horizon. Specifically, the annual inflation rate is anticipated to pick up gradually during 2021 until it approaches the upper bound of the target band, under the impact of supply-side shocks, and – after a sizeable downward correction at the beginning of next year – to climb again and remain slightly above the midpoint of the target, following the earlier reopening of the positive output gap and its subsequent slow widening. However, high uncertainties and risks to the new outlook stem from the evolution of the pandemic and the associated restrictive measures – much of Europe including Romania is in the midst of the third wave of the pandemic – and from the speed of vaccination worldwide, but especially across the EU.


• Bulgaria 

PAST TRENDS: Bulgaria ended 2020 with slower than expected consumer price inflation. CPI showed a return to inflation in July after four months of month-on-month decline in March-June, that then flattened in August. There is still no official statistics data for the full year, but in December it was as low as 0.1% y/y. European Commission estimates inflation stood at 1.2% for the full year 2020.

Source: NSI. 

CURRENT TRENDS: There were mild fluctuations at the beginning of 2021, as consumer prices fell in January but recovered in February.

OUTLOOK: According to projections, Bulgaria’s inflation rate should increase to 1.7% in 2021 and 1.8% in 2022, driven by price increases in processed foods and services. Bulgaria’s central bank has projected that inflation will gradually accelerate in the first half of the year, largely reflecting the expectations of upward movements in international prices of food and petroleum products. Core inflation is anticipated to remain close to the level at the end of 2020 due mostly to assumptions that anti-epidemic measures in Bulgaria will be extended until the end of the first quarter of 2021, which will continue to limit final consumer expenditure of households, in particular in services.


• Serbia

PAST TRENDS: For the eighth consecutive year, inflation in Serbia was kept firmly under control, at a low and stable level, in 2020. The National Bank of Serbia’s (NBS’) projection is somewhat higher for this year, due to the electricity price increase and higher prices of petroleum products, which reflect rising global oil prices, the central bank still expects inflation to move in the lower half of the target tolerance band in the coming period.

CURRENT TRENDS: Inflationary pressures remained low and y/y inflation slowed to 1.3% in December, mostly on account of lower prices of unprocessed food, vegetables and fresh meat, said the NBS. Along with energy prices, it was primarily food prices that determined the dynamics of inflation during the year, which averaged 1.6% in 2020. Average core inflation followed a similar path, though it sped up moderately towards year-end (to 2.1% y/y), reflecting higher demand for products enabling work from home (computers, mobile phones) and medical products.

OUTLOOK: In the next two years, the NBS expects inflation to move within the lower half of the target tolerance band. Slightly higher projected inflation in 2021 relative to the previous projection will be temporary in character, as it primarily reflects the one-off effect of the electricity price increase and the anticipated rise in petroleum product prices resulting from an elevated global oil price. Going forward, the central bank does not expect any major pressures on inflation as it is reasonable to expect that GDP will rise faster than consumption which, coupled with the base effect for food and energy prices, will result in lower inflation in 2022 than in 2021, said NBS governor Jorgovanka Tabakovic.


• Croatia

PAST TRENDS: Croatia’s HICP inflation rate dropped to 0% in 2020 due to the strong decline in energy prices, while core inflation was around 1%. According to statistics office data, the consumer price inflation was 0.1% in 2020.

Source: DZS

CURRENT TRENDS: Consumer prices in Croatia fell by 0.3% in January compared to the same month of 2020. This continued the decrease seen in the previous month, but it softened slightly compared with the 0.7% year-on-year decline in consumer prices reported in December. The biggest decline in annual terms was in transport prices, which dropped by 3.5%. Prices in the most-weighted category, food and non-alcoholic beverages, increased by 1.1% in January.

OUTLOOK: The European Commission expects that in 2021, inflation will pick up slightly but still remain subdued at 1.2% in 2021 and 1.5% in 2022.


• Slovenia 

PAST TRENDS: Following two years of deflation in 2015 and 2016, consumer prices in Slovenia started to increase in 2017 and went up and down to drop to annual average deflation of 0.1% in 2020, following 1.6% inflation a year earlier. The deflation came due to the sharp decline in energy prices in March 2020 that led to deflationary pressures.


Source: SURS

CURRENT TRENDS: Slovenia’s consumer price index (CPI) fell by 1% year on year in February, accelerating from a 0.7% decline a month earlier. Slovenia was mostly in deflation through 2020 amid rising food prices. The largest downward impact on the annual inflation came from lower prices of petroleum products, which was offset by 5.3% higher prices of tobacco.

OUTLOOK: The European Commission expects prices to remain very low in the beginning of 2021 and to increase somewhat in the second half of the year. Overall, prices are expected to increase by 0.8% in 2021. In 2022, taking into account the projected recovery and assumed increase in energy prices, inflation is expected to reach 1.7%.


• Montenergo 

PAST TRENDS: In the 12 months of 2020, consumer prices dropped 0.3% y/y, according to preliminary statistics office data. In 2019, consumer prices accelerated by 0.4% y/y, significantly below the 2.6% y/y CPI in 2018.


Source: Monstat

CURRENT TRENDS: In January, consumer prices moved down 0.7% year on year in January, after decreasing 0.9% y/y in December. Month on month, the consumer prices moved up 0.3%, after rising 0.1% m/m in the previous month.

OUTLOOK: Montenegro’s government has projected that annual inflation will speed up to 1% y/y in 2021, while in 2022 it should accelerate further to 1.5%.


• North Macedonia 

PAST TRENDS: Following three years of deflation from 2014 to 2016, North Macedonia turned to inflation of 1.4% in 2017 that slowed down to 1.2% in 2020, accelerating from a 0.8% inflation a year earlier.


Source: Stat.gov.mk

CURRENT TRENDS: Since the beginning of 2020 the annual inflation sped up from 0.6% in January to 2.3% in December. The biggest contribution to overall inflation came from food prices, and a negative contribution from energy prices. North Macedonia’s annual inflation steadied at 1.9% in January and February this year.

OUTLOOK: The central bank anticipates no major inflation pressures in the country in 2021, but the uncertainty of the movement of world prices of primary products in the coming period is still present. S&P anticipated the inflation will remain low, but increase to 1.5% in 2021 and 2022 and reach 1.7% by 2024, slightly above its projections for the eurozone.


• Albania 

PAST TRENDS Albania’s inflation has been low and steady, prompting the central bank to cut interest rates to record lows; the repo rate is currently at just 0.5%. 

For the last two years, the annual change in the consumer price index has only rarely moved above 2% or dipped below 1%. 

Source: Instat

Average inflation in the fourth quarter of 2020 was 1.6%, a slight increase compared to the previous quarter, with fluctuations mainly reflecting volatility in food prices. Meanwhile, core inflation remained stable, but below the rates targeted by the Bank of Albania. This performance shows the fading out of supply-side shocks in the second half of year, and the weak pressures generated from aggregate demand, central bank governor Gent Sejko said in February. 

After a Bank of Albania rate setting meeting in February, Sejko said that economic activity had improved faster than expected during the second half of last year.  The bank’s supervisory council noted that “inflation continues to undershoot the target, while economic activity and employment remain below pre-pandemic levels”.

CURRENT TRENDS:  Annual CPI inflation dropped from 2% in October 2020 to just 0.5% in January, before reviving to 1.1% in February. The main inflationary pressure in recent months has been from higher food prices, while the transport and clothing and footwear categories — both sectors that have suffered during the pandemic — have dragged down inflation. 

OUTLOOK Average annual inflation is seen by the Bank of Albania at 1.6% in 2021 following a 1.4% growth in 2020. Inflation is expected to remain subdued before converging to the 3% target over the medium term.


• Bosnia & Herzegovina

PAST TRENDS: The convertible mark (BAM) in Bosnia & Herzegovina is fixed to the value of the euro by the Law on the Currency Board. The fixed currency ratio also applies to inflation. In the period January-December 2020, inflation ranged from 1.5% to 0.1%, and from April to December 2020, the Directorate for Economic Planning recorded deflation in the range from -1.2% to -1.6%.

Source: Directorate for Economic Planning of BiH for January 2019 - September 2020 data; Agency for Statistics of BiH for October 2020 - January 2021 data (consumer price trends) 

CURRENT TRENDS: The Directorate for Economic Planning has not published data for the current situation. The latest data refer to October 2020, but for the full year a slower price growth of 0.2% compared to last year can be expected. The directorate says that the movement of inflation in Bosnia is significantly influenced by the level of energy prices, ie oil, food, excise, utility prices etc.

OUTLOOK: Assuming that food prices, as well as utility prices, rise moderately, inflation in the range of 1.2-1.4% can be expected in the in the period 2021-2023, according to an estimate from the directorate. 


• Kosovo

PAST TRENDS: After its peak in 2011 of 7.4%, Kosovo’s inflation slowed down in the following years to reach its lowest level of - 0.5% in 2015 and slim inflation of 0.4% in 2016, then it speeded up slightly to fall again in 2020 to only 0.2%, compared to inflation of 2.7% a year earlier.

CURRENT TRENDS: Last year consumer prices in Kosovo were on a declining trend after the country posted strong inflation rates in 2019. The inflation stood at 1.5% in January 2020 and turned to deflation in July of 0.1%, which continued for five months and then turned again to slim inflation in the last two months of the year. The inflation was boosted by food prices, but the negative influence came from the strong decline of transport prices.

Kosovo posted slim deflation of 0.2% in January and prices started to grow again in February with an inflation of 0.7%

OUTLOOK: According to the IMF, Kosovo’s consumer prices are seen rising by an average of 1.2% in 2021. No more than 2% inflation is expected in the next few years.


• Moldova

PAST TRENDS: Highly dependant on crops and regulated energy prices — and hence highly volatile — inflation in Moldova has broadly decreased since the exchange rate shock in early 2015 prompted by the surfacing of the frauds in the banking system. At that time, the National Bank of Moldova (BNM) had to increase the refinancing rate close to 20% to address the panic that resulted in the depreciation of the currency, later passed on through consumer prices. The headline inflation dropped from above 7% y/y at the end of 2019 to under 1% one year later amid a combination of low global energy prices and subdued demand. Moldova’s GDP plunged by roughly 7% in 2020 and the support provided by the government to the real sector and households was particularly thin. The scarce bank lending during the pandemic period also contributed to the significant demand-side shock. 

Moldova’s refinancing rate has been lowered significantly since 2015, and currently stands at 2.65%. 

CURRENT TRENDS: Consumer price inflation in Moldova edged up to 0.6% y/y in February 2021 from 0.2% in January — when the lowest inflation ever was recorded in the country. The inflation would have been even lower — possibly negative — if it were not for the rise in the price of some agricultural inputs driven by the scarce crops in the region. The food prices increased on average by 1.8% in February, driven by a 7% y/y rise in the price of wheat and maize flour and a 28% rise in the price of vegetable oil. The prices of non-food goods rose by 1.15% y/y with the biggest contribution from the 9.4% y/y rise in the price of tobacco (higher excises). The prices of services decreased by 1.9% y/y in February as the regulated prices of both electricity and natural gas (not included in the non-food goods categories) were revised downward.

OUTLOOK: The annual inflation rate is anticipated by the BNM to decrease insignificantly in the first quarter of 2021, then to increase until the end of the eight-quarter forecast horizon, returning to the proximity of the 5% (+/-1.5pp) inflation target. During 2021 it will remain below the lower limit of the 3.5-6.5% target band. Starting with the first quarter of 2022, it will return within the corridor, positioning itself in the lower level throughout the year. Core inflation will have an upward trend over the entire forecast horizon, registering similar values over the last two quarters. 



• Kazakhstan

PAST TRENDS: Annual consumer price index (CPI) inflation in Kazakhstan stood at 7.5% in 2020, up from 5.4% recorded in 2019. The regulator had previously aimed to achieve a 4% inflation rate in 2020, but consumer prices moved away from the upper boundary of the 4-6% inflation corridor that the central bank was maintaining. Inflation officially surpassed the 6% boundary in March 2020 and continued to rise due to the effects of the global coronavirus (COVID-19) pandemic.


CURRENT TRENDS: Annual consumer price index (CPI) inflation in Kazakhstan stood at 7.4% in February, according to data published by the country’s statistics office. In monthly terms, inflation came in at 0.7%, unchanged from January. Annual food inflation rose to 11.6% in, up from 11.4% in February. Non-food inflation stood at 5.2% in the month, down from 5.3% in the previous month. Inflation in prices of services registered at 3.9% in February.

Kazakhstan's central bank kept its policy rate unchanged at 9% on March 9. The regulator noted that it saw no room for monetary easing amid the current balance of inflation risks, adding that it would move “proactively” if the risks worsened significantly. Potential external inflation risks listed by the regulator included global food price growth, a worsening of the COVID-19 pandemic, oil price volatility and sanctions against Kazakhstan's main trade partners, including Russia and China.

OUTLOOK: Given that inflation rates appears to have currently stabilised around 7%-7.5% and the Kazakh central bank sees no major inflation risks outside global factors, inflation rates may remain largely unchanged this year going forward and begin easing in the second half of the year as the pandemic comes to an end. 

A recovery of the Kazakh national currency thanks to a rebound in world oil prices as part of the global recovery from the pandemic would also support the weakening of inflationary pressures. World oil prices have been strengthening since the beginning of 2021. 

At the same time, potential new lockdowns in major cities could be expected during the spring as authorities expect infection rates to surge. This could lead to an acceleration in consumer price inflation at least temporarily.

• Uzbekistan


Since 2017, Uzbekistan has been switching its economy to a market economy model. Inflation in Uzbekistan in January and February this year accelerated slightly to 11.6% and 11.4%, respectively, from 11.1% in 2020 (2019 inflation was 15.2%) under the influence of rising food prices and seasonal factors, according to the country’s State Statistics Committee.

In January-February, food prices moved up by 1.8% (0.6 pp less than the rise seen in the corresponding period of 2020 and 3.1 pp lower than the gain in January-February 2019). Prices for non-food products moved up by 1.1%.



Uzbekistan’s central bank on March 12 forecast that the inflation rate would slow to 9.0-10.0% by the end of 2021.

Since the beginning of the year, the inflation expectations of the population and business entities have decreased to 16.3% and 17%, respectively, but they remain significantly higher than actual and forecast inflation.

Uzbekistan’s rate-setters kept the key rate unchanged at 14% at their meetings in January and March. The central bank said it was aiming to reduce inflation, while maintaining positive real interest rates.

The regulator’s interim inflation target is “below 10%” by the end of this year.

The weighted average interest rate of the interbank money market in December was 14.4%. It was formed within the limits of the interest rate corridor with a positive spread to the main rate.


• Armenia


For annual inflation, the Asian Development Bank (ADB) expects 1.4% in 2020 to be followed by 2.2% in 2021. The World Bank predicts 0.9% and 2.0%.

As 2020 drew to a close, the central bank intervened in the foreign exchange market, selling $60mn to defend the Armenian dram (AMD) and ensure the steady functioning of the country’s financial markets. The AMD breached several pysychological thresholds as the year wore on, passing 500 per USD in mid-November. By March 16, it stood at AMD526.


The European Bank for Reconstruction and Development (EBRD) noted that “in the absence of significant inflationary pressure, the refinancing [benchmark] rate was lowered four consecutive times in 2020, to 4.25 percent in September.” However, in mid-December, the central bank cited lurking inflation as it hiked the rate to 5.25%. At its February rate-setting meeting, the regulator moved the rate to 5.5%, a level that it stuck to at its March 16 meeting.

RAEX-Europe in January said that it anticipated the Central Bank of Armenia (CBA) “would continue to maintain an adequate expansionary monetary policy. In addition, the inflation rate remains low and has risen only slightly closer to the end of the year whereas the banking system demonstrates a stable stance”.

• Azerbaijan


Azerbaijan’s annual inflation rate crept up from 2.7% to 3% in 2020 and was set to edge up to 3.1% in 2021, according to the International Monetary Fund (IMF). The World Bank predicted 0.9% and 2.0% for 2020 and 2021, respectively.



The World Bank observed that the Azerbaijani central bank was among those in 2020 that stabilised the local currency (the Azerbaijani manat is currency pegged) by tapping their country’s sovereign wealth fund (SWF), adding: “Recent currency depreciation has put further upward pressure on inflation and reduced the scope for additional policy rate cuts, especially for countries with inflation near or above target ranges.”

The benchmark rate stands at 6.25% and Trading Economics forecasts that it will be at that level come the end of the year.

• Georgia 

PAST TRENDS:  The high dollarization of the Georgian economy fortifies the transmission of exchange rate fluctuations to inflation. Concerns over the widening current account gap put pressure on the exchange rate and fuelled inflationary expectations in the second half of 2018, forcing the central bank (NBG) to maintain an active policy particularly with regard to the FX market. In 2019, the NBG could not afford to ease monetary policy, as inflation accelerated from 1.5% at the end of 2018 to 7% one year later. Faced with the sudden stop of inflows that spurred expectations for a major exchange rate correction, Georgian authorities had to act quickly after the onset of the coronavirus pandemic in the spring of 2020. The NBG tightened monetary policy. It has used frequent interventions as needed to supply foreign currency.


CURRENT TRENDS: Georgia's central bank has an inflation target of 3.0%, with CPI in February coming in at 3.6% after dropping below 3.0% in December-January. The regulator has appropriately maintained a moderately tight monetary stance to anchor inflation expectations while safeguarding exchange rate flexibility, the IMF concluded in its December EFF revision. Inflation eased through 2020 helped by subdued demand. The tight monetary policy stance and continued foreign exchange intervention may need to be sustained to prevent disorderly market conditions and bring inflation towards the 3% target, the IMF said. 

OUTLOOK: The central bank has a refinancing rate of 8.0%. Although inflation has declined as demand has weakened, the scope for relaxing monetary policy is limited. The authorities must balance the need to support economic activity against the risk of renewed exchange rate pressures in the context of strong exchange rate pass-through and high financial dollarisation. The widening of the output gap and limited depreciation pressures (in nominal effective terms) are projected to pull inflation below 3% in 2021H1 before inflation starts increasing and reaches the target by end-2021 as demand recovers.

• Kyrgyzstan

PAST TRENDS: Annual inflation accelerated to 9.7% in 2020 from 3.1% in 2019. The surge in inflation, while previously influenced by rising economic growth, continued due to a weakening of imports amid the global crisis induced by the coronavirus (COVID-19) pandemic in 2020.

CURRENT TRENDS: Consumer prices in Kyrgyzstan moved up by 10.6% y/y in February, latest data published by the country's national statistics body shows. The trend continues to be influenced by the coronavirus crisis.

Moreover, the country’s currency has been depreciating with the country hit by a political crisis, which led to Kyrgyz populist President Sadyr Japarov’s rise to power.

The National Bank of the Kyrgyz Republic (NBKR) lately increased its benchmark rate by 50 basis points to 5.5%, marking the first increase in the policy rate since February 2020.

OUTLOOK: Kyrgyz inflation is set to fall to 5% in 2021, according to the ADB. The IMF expects a similar figure at 5.5%. However, the current inflation trend is upwards. 

Consolidation and stabilisation of Japarov’s grip on power may lead to a stabilisation of the Kyrgyz currency and put a stop to the current currency depreciation trend. This may, in turn, weaken inflationary pressures. At the same time, Japarov's rise to power has become a major source of political uncertainty that may continue to be relevant until a parliamentary election rerun in the autumn.

• Tajikistan

PAST TRENDS: Tajikistan’s inflation rate in 2020 registered at 9.4%, up from 7% recorded in 2019. This increase was mainly driven by a rise in prices for foodstuffs by 13%, non-food products by 5.8% and services by 4%.

CURRENT TRENDS: Inflation registered at 9.6% at the end of January. The trend appears to be a continuation of the 2020 trajectory.  In addition, Tajikistan's central bank eased its refinancing rate, cutting it from 14% to 11% in February. This was done to support Tajikistan's business environment, but, given the current inflationary pressures, the rate cut may only help push consumer prices further up.

An IMF team that visited Tajikistan in August and September said the country was experiencing “severe effects from the COVID-19 pandemic”. The team referred to measures taken by the National Bank of Tajikistan (NBT) to support economic activity and financial stability. This included easing reserve requirements and lowering the policy rate. “While these measures are welcome, ensuring strong supervision would be important to maintain confidence in bank balance sheets. An effective fiscal backstop for the Deposit Insurance Fund is recommended and the two formerly systemic and insolvent banks need to be liquidated. Foreign exchange shortages also need to be addressed,” the IMF representatives added.

OUTLOOK: The ADB expects inflation to register at 8.5% in 2021. Given the shortage of foreign currency and the continuous devaluation of the Tajik somoni seen both on the black market and in official rates (for reference: the official rate of the somoni depreciated 10% against the dollar in 2020), inflation trends will likely remain the same as in 2020. Some respite in the decline of remittances in foreign currency from Tajik migrants working in Russia is expected as coronavirus restrictions are eased.

• Turkmenistan

PAST TRENDS: According to figures from Turkmenistan’s National Institute of State Statistics and Information, inflation registered at 13.4% in 2019 and slowed to 10% in 2020. Remote and tightly controlled Turkmenistan’s statistics on macroeconomic trends are entirely unreliable. The change in inflation between 2019 and 2020 does not appear to be in line with reports of worsening shortages of basic goods, which are bound to lead to a surge in consumer price inflation. It is likely, however, that state controls on pricing have kept prices down artificially to an extent.

CURRENT TRENDS: Turkmenistan does not issue monthly macro indicators. The trend is likely similar to the one seen in 2020. Turkmenistan's unofficial black market rate is probably seeing catastrophic inflation trends (when compared to official reports).

OUTLOOK: The IMF calculates that the annual inflation rate in Turkmenistan will end 2021 at 6%, while the ADB sees 8% in 2021. This is, of course, the best case scenario that sees Turkmenistan going into an economic recovery that is not plagued by issues that existed far before the onset of the pandemic.

• Mongolia 

PAST TRENDS: Annual consumer price inflation registered at an average 7.3% in 2019 and 5.6% in 2020, according to Asian Development Bank (ADB) estimates. Though the rate has fluctuated substantially in recent years, there has been a clear, overall downward trend (2014 brought 12.3%).

CURRENT TRENDS: Mongolia’s consumer inflation stood at 1.0% m/m and 2.4% y/y in January, with the y/y increase mainly caused by an 8.4% rise in food and non-alcoholic beverage prices, a 4.2% gain in alcoholic beverage and tobacco prices, 3.4% in clothing, cloth products and footwear and 3.8% in medicine and medical services.

Prices of housing, water, electricity and fuels dropped by 6.3% (electricity, gas and other fuels decreased by 12.3%), and transport prices decreased by 5.2%.

OUTLOOK: The Asian Development Bank (ADB) is counting with consumer price inflation of 8.2% in Mongolia in 2021. The small Mongolian economy remains highly vulnerable to changes in commodity prices and Chinese demand.

The monetary policy council of Mongolia's central bank in late November cut its benchmark interest rate from 8% to 6% after noting a quickening in inflation, while saying inflation would likely remain low due to economic activity and remain within the target.


• Iran 

PAST TRENDS: Iran’s economy has been  devastated—but not defeated—by the swingeing Donald Trump sanctions brought in from mid-2018, plunging the country into three years of bitter recession. What happens next with just about all economic indicators, including inflation, will depend on whether Tehran can reach an accommodation, via a revival of the 2015 nuclear deal, with the Joe Biden administration. Inflation has raged in Iran since Trump launched his “maximum pressure” campaign—consumer prices in 2019 rose 41% and were on course to grow 30.5% in 2020, according to IMF estimates—with wide discrepancies between different product bands. Any assessment of the pricing picture must take into account extensive grey and black market activities.

Iran, inflation rate, average consumer prices (Source: IMF, DataMapper).


CURRENT TRENDS: The IMF says the official annual Iranian inflation rate now stands at 46.2% (compared with less than 10% at the point in May 2018 that Trump quit the nuclear deal). Food and drink price growth is alarming to many Iranians, with complaints cited by UPI lately that chicken, rice and egg prices have nearly doubled over the past year while fresh fruit, beans and vegetable oil prices have increased by around threefold.

In mid-February, pensioners and retired government employees protested in more than a dozen cities across Iran to complain over their financial situation and their state pension, which they said is insufficient to cover the rising cost of living, RFE/RL’s Radio Farda reported. They demanded an increase in their pensions, which they said leave them stranded below the poverty line. Similar protests were held in December and January. During those demonstrations, pensioners called for a 50% increase in their pensions.

OUTLOOK: There are signs that Iran is pulling out of recession, but for quick progress—and a big alleviation in inflation—the Islamic Republic needs a deal that will see US sanctions scrapped. Tehran, having put up painful economic resistance to Trump, will not want to lose face in agreeing one, though.

The Central Bank of Iran (CBI) does not use a benchmark interest rate. Instead, it sets bank profit rates for lending and borrowing. In FX, there are fixed official rates and the more realistic floating free market rates. Official lending of USD and other hard currencies is restricted to approved recipients such as traders bringing in key imports.