In Central and Eastern European markets, inflation is expected to rise or remain above the central banks’ target ranges until the end of 2024. The decline in the CEE consumer inflation rate over the past year has been more than expected, mainly due to the sharp decline of food and energy prices, according to an Allianz Trade analysis.
Recent April data shows a rebound in inflation in Poland (2.4% y/y, March 2.0%), the Czech Republic (2.9% y/y, March 2.0%) and Hungary (3.7% y/y, March 3.6%). The reversal was mainly driven by a stronger increase in food prices, especially in Poland which reintroduced the increased VAT rate. In Poland and the Czech Republic, rising fuel prices also played an important role, reflecting the recent increase in global oil prices. Analysts expect food and energy inflation to pick up for the rest of the year as the core effects mentioned above fade. Meanwhile, in Romania, although it fell to 5.9% annually in April, inflation still remained the highest in the region. By the end of 2024, consumer inflation in Poland (4.6% year-on-year in December), the Czech Republic (3.7%), Hungary (4.8%) and Romania (4.7%) is expected to exceed the central banks’ target ranges again. For 2025, forecasts show a gradual decrease, except in Romania, where this could last until the beginning of 2026.
Allianz Trade analysts expect monetary policy in Central and Eastern Europe (CEE) to be accommodative until the end of 2025, given the outlook for inflation and central banks likely to keep real policy interest rates on a positive note . In addition to rising inflation, there are other reasons for a cautious monetary policy in the CEE region in the coming quarters. These include expectations of a moderate monetary easing cycle by the Fed and ECB, oil price uncertainty amid the current Middle East crisis, as well as rising wages and relaxed fiscal policy in Poland, Hungary and Romania.
In addition, economic activity indicators for the first quarter indicate an improved growth outlook, driven by domestic demand (especially in the services sector), which means that reduced monetary stimulus may be needed for 2024. Against this background, it is expected that the Central Bank of Poland, which started the monetary easing cycle in CEE with two rate cuts in September and October 2023, to keep the policy rate unchanged at 5.75% until at least the third quarter of 2024. The related estimates of a baseline scenario are that the National Bank of Romania will most likely reduce the monetary policy rate by a total of 75bps in the second half of 2024, reaching 6.25% at the end of the year.
“However, the pace of the fiscal deficit (already at over 3%, compared to the initial target of 5% of GDP at the end of the year) could derail our estimates above. Already faced with an inflation that is difficult to reduce in an election year in which the reduction of recurring State expenses does not seem to be a priority, the National Bank could find itself forced to postpone the long-awaited decisions to relax the monetary policy. Inflation at the end of April of 5.9% is falling at a slower pace than previously forecast. A better agricultural year could help to calm inflation, but most likely it will not be able to compensate double-digit increases in budget expenditures, which is why expectations remain moderate,” says Mihai Chipirliu, CFA, Risk Director at Allianz Trade.