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Central European Weekly

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The 2009 budget draft targets a government deficit of 3.2% of GDP

Mon, Sep 29 2008, 11:58 GMT
by KBC Market Research Desk

KBC Bank

Czech Republic

The CNB stays on hold, but indicates that another rate cut will come soon

Hungary

The 2009 budget draft targets a government deficit of 3.2% of GDP

Poland

Just a hiccup or a sign of a broader economic slowdown? Polish industrial output tumbles

Slovakia

The money market is still waiting for the final jump towards higher levels

The Week Ahead

MNB’s meeting could reassure us that inflation is on track to meet the 3% target

Overview

Despite global liquidity squeeze CE money markets are OK Central Europe could not avoid the contagion from the banking crisis, spreading from the United States to Europe: nevertheless, apart from stock markets, we must state, to our satisfaction, that the CE markets remain relatively calm. The significant difference between the market situations in the old and the new Europe is particularly evident in money markets. While the money markets in Western Europe (notably in the Eurozone and the United Kingdom) are under significant tension and liquidity premiums go through the roof, the liquidity situation in Central Europe is much better, with market interest rates basically in line with the anticipation of changes in official interest rates.

Hence, the central banks in Central Europe may concentrate more on conventional macroeconomic management, because the transmission mechanism of the monetary policy is working without problems, as it is not affected by market distortions. What then are the macroeconomic forecasts of the central banks?

Without a doubt, the national economies are following the example of the Eurozone, and obviously decelerating. The anticipated fall in inflation is starting to allow the Czech, Hungarian, and Polish central banks some latitude in the formulation of policy. The Czech National Bank is the leader in this respect, as it has already started its rate cut cycle and, according to statements from the latest CNB Board meeting, it will cut rates again, by 25 basis points, as early as at its next meeting, scheduled for November. The National Bank of Hungary and the National Bank of Poland (we even expect the latter to raise rates once again) will follow the example of the CNB later, but the extent of the rate cuts in those countries will be much greater than in Czech republic, given the higher absolute level of their official interest rates.

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Published on  Mon, Sep 29 2008, 12:02 GMT