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2020/03/03 / Erste Group Research

CEE Special | Central banks at crossroads

Despite rising inflationary pressure, markets began to price in monetary easing in CEE due to COVID-19 outbreak and increasing risks of bigger economic slowdown. Dropping oil price is disinflationary. Should central banks react or wait out recent inflation increase?

Inflation rates in CEE are currently among the highest in Europe. The series of upside surprises began in December 2019 and January repeated the pattern. Inflation surged above the upper bound of central bank targets in Czechia, Hungary and Poland.

The reaction of the Czech and Hungarian central banks was quite immediate. The Czech National Bank raised the policy rate, while the Hungarian central bank intervened verbally, announcing that it will do whatever is necessary to curb inflation. Short-term market rates spiked despite no material change in the policy rate at the last meeting. As opposed to the Czech and Hungarian central banks, the Polish MPC seems untouched by current inflation development and sustains rhetoric of rates stability.

The dilemma as to whether to react to recent inflation increases or wait for disinflationary factors to pass through seems to be a valid one. The Hungarian and Polish central banks remain hesitant to react as rapidly as the Czech National Bank. Due to the coronavirus outbreak, market expectations have changed and monetary easing is being priced in as FRAs went visibly down.

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General information

AuthorErste Group Research
Product nameCEE Economies Special Report
Topic in focusFX, Macro/ Fixed income
Economy in focusCroatia, Czech Republic, Hungary, Poland, Romania, Serbia, Slovakia, Slovenia
Currency in focusCroatian Kuna, Czech Koruna, Euro, Hungarian Forint, Polish Zloty, Romanian Leu, Serbian dinar
Sector in focus-


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