BUDAPEST/WARSAW- Russia’s invasion of Ukraine is putting pressure on central banks along the European Union’s eastern flank to prop up their weakening currencies, forcing Czech and Polish rate-setters into market interventions and Hungary into prolonged rate hikes.
The market sell-off in the wake of the Russian invasion on Feb. 24 and a looming energy price shock in Europe due to a surge in global oil and gas prices compound already strong underlying price pressures in the region, and the currencies’ sharp weakening could fuel additional inflation.
Economists say against this backdrop, the region’s central banks – which have been fighting inflation with rate hikes since June 2021 – have little choice now but to intervene as needed and tighten policy further even as the growth outlook is set to deteriorate as a result of the military conflict.
“The implications of the conflict for CEE-4 monetary policy are firmly hawkish, in our view,” economists at Goldman Sachs said.
“While the crisis is likely to have a dampening effect on growth, the combination of higher commodity prices and FX depreciation is significantly inflationary.”
“Moreover, this pro-inflationary shock is occurring at a time when CEE-4 central banks have been trying to tighten financial conditions to bring exceptionally high inflation rates under control. The recent depreciation of CEE-4 exchange rates is making this task more difficult.”
Goldman Sachs has raised its forecast for peak official rates by 50 bps to 5.5 percent in Poland, Hungary, the Czech Republic and Romania.
On Friday, the Czech National Bank (CNB) intervened in the market against excessive volatility and crown depreciation, its first such move since abandoning a cap on the Czech currency in 2017, lifting the unit from 10-month-lows.
The CNB, which said “it is active on the foreign exchange market and is conducting operations to mitigate excessive fluctuations and depreciation of the crown”, followed the Polish central bank in intervening on Friday. – Reuters
The Czech central bank has already raised rates by 425 basis points since last June to bring its rate to a 20-year high of 4.5 percent and analysts see chances the bank will raise rates by up to 50 basis points at its next meeting in late March. — Reuters
