TOPIC OF THE WEEK: Monetary policy in a wait-and-see mode in 2025

CAUCASUS / CENTRAL ASIA - Report 21 Feb 2025 by Ivan Tchakarov

Inflation in the CCA space peaked in mid-2022 and has been on a steady downward trajectory through 1Q24, when it bottomed out. Some acceleration of price growth has gradually become ever more evident across the board since later in 2024, and I anticipate that momentum to entrench itself over the course of 2025, as well. Central banks in the region have generally followed that broadly benign inflation pattern, having started to ease policy in 2022, accelerating the momentum over 2023 and in the first half of 2024, before pausing to take stock since then.

As a result, real policy rates peaked last Feb, but the combination of lower nominal rates and accelerating inflation has brought down real rates to levels that are more in line with historical readings. Thus, the behavior of real policy rates itself already suggests that there are no obvious signals to monetary policy right now in terms of its being too tight or too easy. This very loose quantitative observation is confirmed by the three quantitative approaches that I use to evaluate the monetary policy stance in the region.

The policy stance can be model-characterized as tight in the case of Georgia and Uzbekistan, neutral in the case of Armenia and Georgia and easy in the case of Tajikistan. This is broadly consistent with how I assess the state of monetary affairs in these countries. Policymakers in Georgia and Uzbekistan still prefer to err on the side of caution and maintain a relatively restrictive stance, albeit for different reasons. Expectations that inflation will almost double by year-end in Tajikistan creates a backdrop against which the central bank may need to tighten towards the end of the year. In Armenia, the central bank has been the most aggressive in the cycle, having already lowered the policy rate by 400bpts. There could be still some modest scope for more easing, but the end of cuts is near. Azerbaijan has a fixed exchange rate regime, so one can glean less useful information from this type of analysis, but I tend to think that a hike is more probable than a cut at this juncture given the recent fast acceleration of price growth.

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