CEE Special | Should elevated inflation be of concern?
Inflation in CEE contrasts with level in Eurozone. Economic slump caused by pandemic did not change picture much, as headline inflation peaked in Czechia, Hungary and Poland. However, central banks will likely remain on hold and will not react to elevated inflation.
The data since the beginning of the year has shown some divergence of inflation developments between the CEE region and the Euro Area. While deflationary effects caused by the pandemic and low energy prices resulted in inflation dropping to negative territory in the Eurozone, headline inflation remained boxed in between 3% and 4% in several CEE countries. It slowed down in these countries as well, but the decline was less pronounced. What is behind such different inflation developments?
The first reason for the different inflation developments is the exchange rate move and its pass-through into inflation. Since the beginning of the year, global risk aversion pushed CEE currencies up, with the Hungarian forint depreciating by 9.3%, the Czech koruna by 7.6% and the Polish zloty by 5.5%. The very tight labor market could be another reason why inflation has not dropped so much in several CEE countries. According to Eurostat data for 2Q20, Czechia together with Poland enjoyed the tightest labor markets in the entire EU.
Should increased inflation become a concern for central bankers? We think that, in the coming quarters, regional central banks will continue supporting economies in the recovery and elevated inflation will not be a concern. With expected moderation of inflation next year in Poland and a stable inflation outlook in Serbia and Romania, we expect central banks to remain on hold at least until the end of the year. On the other hand, in Czechia, we foresee one 25bp interest rate hike at the end of next year. In Hungary, we expect monetary conditions to tighten and the 3M rate to increase by the end of the year.