Quick rate hikes in CEE? Not that fast

Inflation and stronger currencies help central banks to stay moderate in CEE, even in countries where tightening is on the near-term horizon

'Can the recent moderation in inflation rates still support the dovish camp in CEE central banks?'

Croatia: The inflation trajectory in our view remains supportive of a lax monetary policy stance in Croatia. CPI ex-food & energy has in recent quarters continued to move in a comfortable sub-1% region and the headline also moved below 1% y/y at the end of 2Q16, suggesting average CPI standing close to 1% in 2017. Additionally, given the currency peg, the always important exchange rate trajectory has in the recent period brought intensified appreciation pressure (both seasonal and fundamentally-driven), triggering FX interventions and allowing the CNB to continue to support hefty LCY liquidity and consequently support credit channel and low rates.

Czech Republic: Despite the recent moderation in Czech headline inflation, we see the possibility of an August hike as relatively high. First, the inflation slowdown was influenced mainly by supply-side factors, whereas core inflation is relatively stable (2.5% y/y in June). Moreover, several other factors have become important for the CNB, in our view. The risk of capital outflow associated with the 'overboughtness' of the koruna and significant increase in property prices are the most notable factors. However, after the first hike, we expect the CNB to take a break and proceed with the next hike in approx. mid-2018.

Hungary: The moderation in the headline inflation in 2Q17 was transitory, in our view. The core inflation rate ticked up to 2.4% by June, and should continue to gradually accelerate in tandem with the headline rate in 2H17. Even though underlying developments reflect a continuous build-up of inflationary pressure, the central bank has not given up its dovish stance, and is not expected to do so this year. The MPC sees the inflation target being met in a sustainable manner no earlier than in 1Q19. As long as the 3% target is undershot, the MPC stands ready to further ease monetary conditions. We see the 0.9% policy rate unchanged until end-2019, and the 0.15% 3M BUBOR at current or lower levels by end-2018.

Poland: In recent months, CPI decreased from the peak at 2.2% y/y in February 2017 to 1.5% y/y in June, whereas core inflation stabilized at 0.8% y/y. Recent moderation in inflation rates as well as the limited risk of overshooting the target rate of 2.5% in the medium term supports the dovish MPC stance. Labor market tightening and wage growth pressure remain at a moderate level, which further limits the inflationary pressure. Moreover, we expect the inflation rate to ease further to 1.2% in December. Although we heard hawkish comments from some members of the MPC recently (Zubelewicz would support a rate hike even this year), we remain dovish and expect a rate hike no sooner than at the end of 2018.

Romania: The NBR has maintained the key rate at 1.75% at the beginning of July, in the context of a moderate increase in inflation, which is still below the target, and fiscal uncertainties for 2017 and 2018. We see the NBR leaving the key rate untouched throughout 2017, as strong household consumption has not yet translated into visible inflationary pressures. The increase in inflation in 2H17 could be a bit milder than previously estimated, due to a softer rise in the volatile food price, but the risks for our 2018 inflation forecast are skewed to the upside because the government could take some compensatory fiscal measures to stem the expansion of the budget deficit. We do not rule out a hike in the deposit rate towards the end of this year, with the view of strengthening the monetary policy transmission mechanism by bringing short-term market rates closer to the key rate. Before any monetary tightening, however, the NBR may ponder stricter prudential measures in particular segments of the market, e.g. unsecured consumer lending.

Serbia: The wording from recent meetings of the NBS Executive Board indicate that monetary policy makers in Serbia are mostly focusing on core inflation, which is steadily moving around 2% y/y, which leaves comfortable room for the NBS to keep the key policy rate unchanged until the end of the year. In addition, continuous appreciation pressures on the RSD, which are expected to stay pronounced during the summer months, should also contribute to a stable overall inflation environment in the following months. Thus, we do not expect any surprises or deviations in our baseline scenario, where we see the key rate unchanged at 4% in 2017 and a gradual increase from the end of 1Q18, following the expected ECB tapering.

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