Czech Republic
The picture of the Czech economy again deteriorates
Hungary
VAT hike in July has had only 50% pass-through on headline inflation
Poland
Polish budget woes weigh on the zloty
The Week Ahead
Polish inflation and industrial production figures take central stage
Overview
Czech and Hungary’s Recession Cool Inflation Pressures
While the Czech Constitutional Court issued its ruling, which effectively means a postponement of the early election from October to November (or even later), a series of fairly interesting macroeconomic figures was released, particularly in Hungary and the Czech Republic. These included August inflation and July foreign trade data.
The Czech and Hungarian inflation data indicate that the recession is starting to show a strong disinflationary or even deflationary character. Prices in both countries went down on a month-on-month basis, suggesting two important findings for year-on-year data: The Czech Republic’s inflation will turn negative in the next few months, while the recession in Hungary has completely eliminated the ‘positive’ effect of the VAT hike on inflation. Thus the Czech National Bank and the National Bank of Hungary won’t be hindered by inflation worries when deciding on the appropriate path for monetary policy. So the Czech National Bank can keep its rates at the recordbreaking low levels for the foreseeable future while the Hungarian Central Bank has room to implement further rapid cuts in its base interest rate.
The recession in Hungary and the Czech Republic involves not only a complete lack of inflation pressures, but also surprisingly aggressive trade balance improvements. These are happening despite the export-oriented industry of both countries suffering from a lack of demand in Western Europe. Nevertheless, the collapse of domestic demand, in combination with the improvement of terms of trade, stemming from cheaper oil prices, are factors that eventually will drive the trade balances of both countries to significant surpluses. These subsequently work as the natural (fundamental) support to the forint and the koruna, now that the NBH and the CNB, due to the recession, are able to stay or become very dovish.
