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Central European Weekly

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Hungary − NBH set to hike rates, political turmoil in the focus

Mon, Mar 31 2008, 10:58 GMT
by KBC Market Research Desk

KBC Bank

Czech Republic

The CNB Leaves Rates Unchanged

Hungary

NBH set to hike rates, political turmoil in the focus

Poland

The MPC raises interest rates and indicates it will continue tightening...

Slovakia

The NBS has maintained the status quo for eleven months

Overview

Czech and Polish monetary policy on the crossroads

At the end of last year and the beginning of this year, the National Bank of Poland and the Czech National Bank were a well-synchronised tandem: notwithstanding the aggressive cuts in U.S. rates, Czech and Polish interest rates continued to climb. However, the situation is starting to change and the strategies of these two Central European central banks are beginning to diverge. Last week, in accordance with expectations, the National Bank of Poland raised rates to 5.75%, and indicated the need to continue its monetary tightening. The Czech National Bank, by contrast, left rates unchanged and, by its bland statements, more or less confirms that rates should remain stable for a longer period of time. Why is there no need for the Czech Republic to continue to tighten its monetary policy, despite its interest rates being the lowest in the European Union (3.75%) and its inflation being the highest for the last nine months (7.5% y/y)? We should cite at least three crucial differences between the situations in the Czech Republic and Poland. Firstly, the koruna has strengthened more than the zloty over the last six months, thus tightening the Czech monetary conditions more significantly, which are, according to our calculations, the tightest in the last seven years. Secondly, the Czech monetary conditions, and consequently the CNB’s policy, are more susceptible to exchange rates than is the larger and relatively less open Polish economy. Thirdly, the nominal and real wages in the Czech Republic are rising somewhat more slowly, thus minimising the risk of demand-pull inflationary pressures and the risk of a wage-inflation spiral.
By and large, the CNB may now afford to wait for the dissipation of the one-off inflationary factors, which are largely associated with one-off administrative and reform measures (regulated prices of energy and rent, VAT, healthcare fees). On the other hand, the less open Polish economy is confronted with faster wage growth and relatively easy monetary conditions, and therefore Poland should continue to raise rates.

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Published on  Mon, Mar 31 2008, 11:07 GMT