Marek, everybody else is cutting

This morning, the Swedish central bank in a surprise move cut its key policy by 50bp to 0.25% on the back of continued inflation well below the Riksbank’s official 2% inflation target. Hence, the Riksbank is following the trend towards lower monetary policy rates across Europe as deflationary pressure become increasingly evident.

These deflationary pressures are also very clear in Central and Eastern Europe. As a consequence, it is only natural that the region’s central banks cut interest rates – just to keep real interest rates unchanged.

This is what is happening in Hungary, where we expect the central bank (MNB) to continue its policy of baby-step rate cuts and cut by another 10bp points to 2.30%. This seems fully justified now that we have outright deflation in Hungary, which is well below the MNB’s official 3% inflation target. Also, consensus expects another 10bp rate cut.

That said, there are certainly also reasons why the MNB might begin to complete ending the rate cutting cycle. First of all, the deflation in the Hungarian economy to a large extent reflects supply factors rather than weak demand. Second, growth has been picking up in the Hungarian economy and we are likely to be getting close to, or maybe above, potential growth in the Hungarian economy. Finally, as rates are coming down, carry on the Hungarian forint has been coming down. Indeed, this week, the forint has been a little under pressure and that could potentially prompt the MNB to pause in the rate cutting cycle.

Meanwhile, in Poland real rates are going up

In Poland, the picture, however, is different. Despite Polish inflation continuing to be well below the Polish central bank’s (NBP) official inflation target (2.5%), the central bank yesterday kept its key policy rate unchanged and said that it did not see any reason to cut rates in the near future.

However, inflation will soon turn into deflation – we think we could see consumer prices falling close to 1% y/y in the coming months. This, combined with rate cuts in other European countries, could, in our view, eventually force the hand of NBP governor Marek Belka, as a continued rise in real interest rates could very well halt the moderate recovery in Polish economy.