Central Europe's policymakers double down on hawkish message
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[April 07, 2023] By
Jan Lopatka
PRAGUE (Reuters) - Central bankers across central Europe have doubled
down on their hawkish policy messages in the past two weeks in a bid to
persuade investors to ditch bets that they will soon begin an easing
cycle, and their message is starting to gain traction.
Their policy warnings come despite a European market downturn in the
wake of Credit Suisse' demise, which raised bets that global banks would
begin to ease monetary policy.
As central Europe's central banks were faster than their major peers to
hike rates, they had also been expected to lead the way in easing. While
this may still be true, it now looks like happening later than
previously thought.
But that narrative is changing, with factors such as tight labour
markets and solid wage growth across the region playing their part, and
investors are starting to catch on.
"High wage pressure will keep core inflation elevated and may lead to
delayed monetary easing compared to current expectations," Erste Bank
said in a note on Thursday.
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The Czech central bank, which had been seen as dovish under its new
leadership and has refused to hike rates since last June despite calls
to do so from its own monetary department and outside analysts, has in
fact firmed up its hawkish messaging.
Its Hungarian counterpart, which some had thought would start easing in
March, has instead pledged to keep rates unchanged for a prolonged
period to quash inflation expectations - price growth in Hungary may
have dipped in Februarty, but it remains eye-wateringly high 25.4%.
Poland's central bank held rates steady this week and Governor Adam
Glapinski said it was still ready to hike if needed, although rates
would not need to rise more if economic developments follow its current
outlook.
The Czechs, referring to strong January industrial wage data, warned on
March 29 that the market was prematurely pricing in rate cuts, and
Governor Ales Michl said a hike may still be on the cards in May if the
risk of a wage-price spiral grows.
That message was underlined on Thursday when February data showed
industrial wage growth in the double digits.
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In the market, forward rate agreements are not pricing in the chance of
a Czech rate hike, but they have risen from this year's lows, even if
they are still pencilling in easing from the third quarter.
"Upon nomination, markets read the current...board as dovish-leaning,"
JP Morgan said.
"Yet, what we see now seems far removed from that premature assessment.
The message from the board is as hawkish as could be."
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![](../images/040723PIX/busine56.jpg)
A view of the European Central Bank
(ECB) headquarters in Frankfurt, Germany March 16, 2023.
REUTERS/Heiko Becker//File Photo
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That message of interest rates being kept "higher for longer" has been
pushed by two new Czech vice-governors with prior board experience - Jan
Frait and Eva Zamrazilova.
The argument is that policy had been loose both at home and abroad for
too long over the past decade, and that would lead to higher equilibrium
interest rates ahead.
While this does not mean the Czech repo rate will necessarily stay at
7%, it does suggest resistance to any rapid loosening.
JP Morgan said the risks to its call that rates would begin falling in
August were now "severely skewed for a later start".
Goldman Sachs is penning in no change all year.
"We do not expect a rate hike," it said after the Czech policy meeting
last week. "Equally, however, we think the bar to cutting rates is also
high," it said.
HUNGARY ON SIMILAR PATH
That could put the focus on Hungary, which has the European Union's
highest base interest rate at 13%, and an 18% quick deposit rate to
underpin the forint and fight inflation.
While there had been some market speculation the National Bank of
Hungary could easing policy last month, the rhetoric at the March 28
meeting instead consolidated the outlook more towards June, giving some
support to the currency.
"The NBH has made it clear that priced-in rate cuts are not on the table
at the moment, which should keep FX carry by far the highest in the
region," ING said in a note.
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The Polish central bank also struck somewhat hawkish tones at its
news conference on Thursday after holding rates steady.
"The NBP president did not mention autumn 2023 (for cuts) by himself
this time. It can be considered a hawkish accent," Bank Pekao said
in a note.
Romania's central bank left rates unchanged on Tuesday and said
inflation may come down faster than previously thought. But it said
economic activity dropped less than expected, and analysts believe
it will not move this year at all.
"The first interest rate cut probably won’t arrive until early 2024
once policymakers feel more confident that price pressures have
eased," Capital Economics said in a note.
(Reporting by Jan Lopatka, additional reporting by Pawel Florkiewicz
in Warsaw and Gergely Szakacs in Budapest; Editing by Hugh Lawson)
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