Czech Republic
The worst Industrial output in the modern history
Hungary
IMF gives a relatively positive assessment
Poland
Zloty sell-off continues
The Week Ahead
Will the Polish industrial production follow poor Czech and Hungarian examples?
Overview
Weaker zloty and koruna as welcome help for economies
After a prolonged period, inflation rates in Central European countries have settled within the bounds set by their respective central banks. The Czech, Hungarian, and Polish year-on-year inflation rates are below 3.5% now. This is something the region has seen never before. What is more, the inflation future is even brighter as headline year-on-year inflation is likely to fall significantly, to less than 2% within the next few months.
However, the gratified smiles on the faces of central bankers from the Czech National Bank, the National Bank of Hungary, and the National Bank of Poland disappear when they realise why the disinflation has occurred. The inflation success has been achieved at a time when Central Europe is confronted with a drastic negative external shock, which involves a rapid fall not only in commodity prices, but also in demand for the products exported from Central Europe towards the West. Given this, central banks will tend to ease their monetary conditions and not only through interest rates but particularly through the exchange rate. In this context, a weaker local currency will work not only as a support to exports, which are sensitive to exchange rates, but also as an importer of inflation, i.e., a phenomenon that doesn’t need to be necessarily negative in today’s macroeconomic situation.
Nevertheless, we should add a note to what has been said above – the easing of monetary conditions through the exchange rate channel is certainly desirable for the Czech and Polish economies, but not for Hungary, where households and the State have incurred significant debts in foreign currencies. Hence, to avoid doing more harm than good, the MNB needs to be very careful in cutting its base interest rate, as this may lead to further depreciation of the forint.
