Czech Republic
Falling demand in Western Europe is driving the Czech economy into recession.
Hungary
A rally drives the currency higher and yields roughly 100bps lower
Poland
Higher inflation is not going to prevent interest rates from going lower
The Week Ahead
Polish Industrial Production Figures Will Show Further weakness
Overview
Hungarian and Polish households cheer SNB policy
An event that may have a fundamental effect on the Hungarian and Polish currencies and economies took place, but this time it was not in Central Europe, the euro area, or the United States, but in Switzerland. The Swiss National Bank not only cut official interest rates, but it also made clear that, given the deflation threat, it is going to intervene and weaken the franc. Why is it so important for the Hungarian and Polish markets and economies?
In recent years, Hungarian as well as Polish households have been charmed by Switzerland’s low interest rates, so much so that, notwithstanding the exchange rate risks, they did not hesitate to incur large debts in the Swiss currency. However, the escalation of the financial crisis involved not only the depreciation of the forint and the zloty, but also the appreciation of the franc. Naturally, this was a fatal combination for Hungarian and Polish borrowers indebted in the Swiss currency. Hungary and Poland thus welcomed the Swiss National Bank’s move so heartily, while the other developed countries may only accept it with grinding teeth. The unilaterally motivated steps by the Swiss central bank will not be accepted with understanding in the euro area in particular, where the monetary policy encouraged by the currency depreciation against the euro will be viewed as a competitive devaluation in terms of a ‘beggar your neighbour’ policy. Nevertheless, this problem won’t bother Hungarian and Polish households, whose mortgage and consumer loan payments had increased significantly with the strengthening franc.
