New Europe Weekly

Hawkish ECB = higher CEE rates

Fri, Jun 13 2008, 15:59 GMT
by Danske Research Team

Danske Bank A/S


With oil prices rising sharply and Euroland inflation ap-proaching 4% the ECB has turned decisively more hawkish. As a consequence we have changed our rate forecast for the ECB and now expect the ECB to hike its key policy rate by 25bp in July and won’t rule out fur-ther rate hikes. ECB’s more hawkish stance no doubt will also have impact on monetary policy in the Central and Eastern European countries where monetary pol-icy is likely to follow the lead from the ECB.

For the Baltic countries and Bulgaria where monetary policy is closely linked to the euro area through the countries’ fixed exchange rate policies money market rates are likely to move up in line with euroland rates.

In Poland, Hungary, the Czech Republic and Romania that all have floating exchange rates the impact is likely to be less direct. That said, if the ECB hikes and the “floaters” in CEE do not follow it is likely that these countries’ currencies sooner or later will come under depreciation pressure and could push up inflation. Therefore, we think it is likely the central banks in Po-land, Hungary, the Czech Republic and Romania will shadow the ECB’s action – if not 100%, at least as much as to make sure that they do not risk their cur-rencies coming under too much pressure. Until now the CEE currencies are holding up remarkably well despite rising global risk aversion. This might be explained by the fact that the markets for now believe the CEE cen-tral banks will remain hawkish and will shadow the ECB if it tightens monetary policy.

While we are not terribly impressed with the conduct of monetary policy in Turkey and South Africa recently there is no reason to doubt the inflation fighting cre-dentials of for example the Polish or the Hungarian cen-tral banks. This is good news in challenging times.

Published on  Fri, Jun 13 2008, 16:01 GMT

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