CCAMTAC and JVI Joint Webinar: Regional Economic Outlook: Inflation Dynamics and Spillovers of US Monetary Policy

Moderator
Mr. Patrick Imam, Deputy Director, Joint Vienna Institute

Presenters
Mr. Filippo Gori, Economist, Middle East and Central Asia Department, IMF
Mr. Mohamed Belkhir, Economist, Middle East and Central Asia Department, IMF 

Country Interventions
Mr. Azat Kozubekov, Head of Economic Department, National Bank of the Kyrgyz Republic
Mr. Hayk Avetisyan, Head of Monetary Policy Department, Central Bank of Armenia
Mr. Rustem Orazalin, Head of Monetary Policy Department, National Bank of Kazakhstan
Ms. Urgamalsuvd, Head of Division, Monetary Policy Department, Bank of Mongolia

The webinar, organized jointly by the Caucasus, Central Asia, and Mongolia Regional Capacity Development Center (CCAMTAC) and the Joint Vienna Institute (JVI), featured the presentation of the latest Regional Economic Outlook (REO) of the Middle East and Central Asia Department of the IMF. It focused on the inflation dynamics in the Central Asia Region and Mongolia, as well as the potential spillovers of tightening US monetary policy on the region.

Having been mostly absent on a global level for more than a decade, inflation has made a comeback, initially due to supply chain disruptions brought about by the pandemic and the surge in demand during the recovery, and more recently as a result of the war in Ukraine and the subsequent increase in commodity and food prices. The cycle of rising interest rates in advanced economies also adds to rising pressures on the exchange rate in emerging and developing economies already hit by the pandemic. 

In the first presentation, Filippo Gori gave a structured overview of the inflation dynamics and its drivers in the Caucasus and Central Asia (CCA) and discussed the impact of global shocks on domestic inflation. Headline inflation in CCA was rising even before the pandemic and continued to surge in 2021. Despite differences in the structure of economies and policies, most countries in the region have witnessed similar upward inflation paths. Overall, the analysis concludes that external factors have been the main driver of price dynamics in the region, both historically, but also in the current episode. International food prices have the highest impact on domestic prices, even if the pass-through is relatively short-lived. The pass-through of oil prices matters only for a subset of countries in the region, mainly oil-importers, and supply-chain disruptions appear to affect domestic inflation with a longer lag. Domestic demand has only a limited contribution to driving inflation, although there is some evidence that expansionary fiscal and monetary policies and the strength of the ongoing recovery are associated with the recent surge in inflation. From the monetary policy perspective, short-term inflation expectations have risen above the inflation target for several countries, but long-term inflation expectations remained broadly anchored.

In the second presentation, Mohamed Belkhir focused on the implications of US monetary policy normalization for the region. Portfolio inflows to the Middle East and Central Asia region could decline substantially, particularly under a scenario of aggressive tightening by the Fed and heightened global risk aversion. A rise in US interest rates would result in adverse spillovers to equity markets, exchange rates, sovereign yields, and the real economy. Countries with stronger fundamentals would suffer a lower rise in their sovereign yields. While elevated vulnerabilities and war-induced market volatility are likely to amplify spillovers in emerging markets, high oil prices are expected to reduce oil exporters’ vulnerabilities, which is beneficial for several countries in the region. 

During the subsequent discussion, representatives of the monetary authorities from the Kyrgyz Republic and Kazakhstan shared their perspective on domestic inflation dynamics, key drivers of inflation and the policy response of respective central banks to the rising inflation. In addition, they briefly touched upon how the war in Ukraine has been affecting their economies. Authorities from Armenia and Mongolia communicated their assessment of global financial conditions and prevailing risks for the region and considered measures that could reduce countries’ exposure to those risks. They also discussed different outcomes that could result from the US monetary policy tightening, including hard landing/recession risks and further inflation acceleration. 

Aliya Kistaubayeva, Economic Analyst, CCAMTAC