New Europe Weekly
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Sharp drop in inflation equals lower rates
Fri, Nov 7 2008, 15:24 GMT
by New Europe/EMEA Research
The outlook for growth in Central and Eastern Europe has deteriorated significantly over the past month and it now seems that sequential GDP growth is likely in Q4 in most CEE economies. Furthermore, commodity prices continue to fall. Both factors should contribute to easing inflationary pressures in CEE significantly across the region.
This week the Czech central bank slowed the way and cut its key policy rate by 75bp to 2.75%. This and the sharp deterioration of the growth outlook in the region will undoubtedly increase pressures on other central banks to follow suit and ease monetary policy. The scope for easier monetary policy however is not the same for all countries across the region. Two primary factors limit when central banks in the region have to decide on monetary policy at the moment. First, what is the level of inflation relative to the central bank's inflation targets; and second, to what extent does the central bank have to pay a 'risk premium' to secure its country's funding needs?
In terms of the inflationary outlook, as stated above, we expect inflation to come down significantly over the next 12 months and hence allow more scope for monetary easing. That will be the case for basically all countries across the region. Therefore, differences between monetary easing across the region will be due to differences in risk premiums. The Czech central bank has already demonstrated that it has some room for manoeuvre and we expect further rate hikes in the coming months from CNB. Similarly, the Polish central bank should have room to start cutting rates in the coming months - perhaps as soon as the upcoming rate decision at the end of November. Countries with large funding needs such as Romania, Hungary and Turkey will on the other hand find it very hard to ease monetary - or fiscal - policy despite an expected significant slowdown in growth.
Published on Fri, Nov 7 2008, 15:29 GMT
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