EEC: Central banks in hardline mode – ING

Yesterday’s inflation figures in the region brought surprises in both directions. In Hungary, inflation surprised slightly on the downside with a drop from 3.1% to 3.0% year-on-year. On the other hand, in the Czech Republic, it surprised on the upside with an increase of 2.2% to 2.6% year-on-year. In both countries, this is in line with the trend of surprises in recent months and our risk indications. However, central banks are now in hawkish mode in Central and Eastern Europe (CEE) and, although in Hungary this will not be a reason for a rate cut in October, in the Czech Republic the probability of a pause increases in the cut cycle, says Francesco Pesole, FX analyst at ING.

EEC FX remains fragile

“This morning we also got September inflation figures in Romania. Inflation fell from 5.10% to 4.62%, slightly below the consensus of 4.70%. At the last meeting in October, the central bank left rates unchanged after two previous cuts. Our economists do not expect a rate cut at the November meeting, but the weaker inflation numbers leave this issue open.”

“Although the first half of the week suggested stabilization and finding ground underfoot, yesterday shows that the situation is not simple. As we have discussed here before, global risks have not changed much and the CEE FX remains fragile. With higher inflation figures in the Czech Republic, we see an opportunity for hawkish comments from the Czech National Bank that could support the crown in the current uncertain environment.”

“On the other hand, the National Bank of Hungary has already commented on the current situation, essentially ruling out a rate cut in October. However, the EUR/HUF is back above 400 and not far from 402. Thus, the krona and zloty appear to be more defensive in these conditions, while the forint, as usual, remains more sensitive to global exposure.”