Analysis – Focused on stimulating growth, the CEECs avoid the threat of short-term inflation

By Krisztina Than and Jason Hovet

BUDAPEST / PRAGUE (Reuters) – Central European rate regulators mostly appear poised to weather an impending spike in inflation and let their economies bounce back with vengeance after the COVID-19 shutdown, driven by strong demand internal, investments and funds of the European Union.

Eastern EU members, whose labor markets and wage growth have remained vibrant, face stronger inflationary pressures than others in Europe.

It comes as their economies are just starting to recover from the pandemic – which has led to the world’s highest number of per capita deaths from COVID-19 in Hungary and the Czech Republic – and governments seek to reopen stores, restaurants and other services as quickly as possible. to limit the fallout.

Headline inflation, however, is expected to climb to around 5% in Hungary in the second quarter and exceed the target in Poland. In the Czech Republic, price growth is on the rise again after returning to its target earlier this year.

But among those countries, analysts are only suggesting that the Czech National Bank start rate hikes in 2021. Its governor, Jiri Rusnok, told Reuters last week that a debate could start as early as August. But the bank also said it would not be rushing to hike.

Peter Virovacz, economist at ING Bank in Budapest, said that in the case of Hungary and Poland, the authorities are more willing to let inflation accelerate.

“There is a good chance that neither the Hungarians nor the Poles will want to curb growth, so we will see economies under high pressure in the CEECs after the pandemic,” he said.

“Rapid growth, high investment rates, the authorities boosting potential GDP growth rates – at the cost of higher inflation and deterioration in competitiveness which can be offset by a lower forint.”

He added, however, that the Hungarian bank may still have to increase its one-week deposit rate if the forint weakens too much.

SWOLLEN BUDGETS

Hungary and the Czech Republic also raised their budget deficit targets to make room for more fiscal stimulus, adding to a robust monetary stimulus across the region that was producing the fastest growth rates in the EU. before the pandemic.

“We have changed the 2021 budget so that it can better serve the restarting of the economy as we have launched huge home renovation and construction programs,” Hungarian Prime Minister Viktor Orban said on the radio on Friday. of state.

Nationalist Orban, who faces a tough re-election challenge in early 2022, has long relied on the economy as the big winner of the votes. His government has provided strong financial support to families over the past decade.

Hungary, which has led the EU’s vaccination campaign with almost 38% of its population vaccinated, has already opened all shops and restaurant terraces and plans to reopen hotels and most services in them. next days.

It is targeting a budget deficit of 7.5% of economic output now, down from 6.5% previously, while the Czech government is forecasting a budget gap of 8.8% of GDP, from 6.6%, as pledged by Past spending such as state wage increases and record income tax cuts are adding to the pressure on the budget.

Inflation in Central Europe https://fingfx.thomsonreuters.com/gfx/mkt/qmypmllegvr/2021-04%20CEE%20inflation.png

Meanwhile, central banks are still in easing mode, ignoring the risks of reflation.

The National Bank of Hungary, facing a breach of its target range of 2-4%, left interest rates on hold on Tuesday.

The bank considers a rise in inflation temporary, but said it would monitor it closely for any possible second-round effects. It has also expanded its huge open QE program.

Also on Tuesday, however, the central bank urged the government to reduce the budget deficit faster next year, to avoid further inflation risks.

In Poland, inflation is also expected to exceed the upper end of the central bank’s target range of 2.5% plus or minus a percentage point in the coming months, but Governor Adam Glapinski said rates would likely stay on. unchanged until the end of its mandate in 2022 in 2022. in order to support the economy.

The bank says the rise in inflation would be temporary and fueled by factors that monetary policy cannot influence.

QUICK RECOVERY

Employment is already improving in the region which suffered from significant labor shortages before the pandemic, while wage growth has maintained a strong pace, but not in double digits as before the pandemic .

Households have accumulated their savings and there is strong pent-up demand that could help a rapid recovery.

“We are relatively optimistic about the growth prospects (in Central and Eastern Europe) in 2021 and 2022, particularly in 2022, despite the third wave. We expect the economies to have adjusted quite well and we expect that demand performance is also recovering quite well, ”said Arvind Ramakrishnan, analyst at Fitch Ratings.

While growth in the first quarter has likely contracted due to the lockdown, the Hungarian government is forecasting 4.3% growth for this year and has said growth could exceed 5% in 2022.

Poland is forecasting 4% growth this year. The Czech economy is expected to recover more slowly, at a rate of 3.1%, according to the finance ministry. The Czech Republic plans to reopen its stores, markets and some services from next Monday, while Poland will also reopen its shopping centers next week.

(Additional reporting by Alan Charlish in Warsaw; editing by David Evans)


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