Analysts warn of need to tighten budgets, monetary stance in CEE


Despite rapid growth, there are few signs of the economy overheating in Central and Eastern Europe, but the risk of losing macroeconomic equilibrium could build unless budgetary and monetary policies are tightened in the near future, warns a study by London-based economic research consultancy Capital Economics.   

Average economic growth picked up to 5.4% annually in the region in the third quarter, the quickest pace since 2008, while aggregated wage growth picked up to 7.7%, from 5% in Q2, the analysts were cited as saying by Hungarian news agency MTI.

Real effective exchange rates rose in all economies of the region and unit wage costs rose at 5-10% rates in Hungary, Romania and the Czech Republic, indicating that wage growth and inflationary pressure are starting to erode competitiveness, the analysts noted.

The current situation does not yet compare to the overheating of the time preceding the 2008 financial crisis, Capital Economics observed, noting the moderate pace of credit outflow, the fact that - unlike one decade earlier - loan outlays are rather in local than in foreign currency, stocks are not overpriced, and the current account position of the countries concerned is much healthier than before the crisis.   

Adapting the Taylor Rule, under which a rise in inflation should prompt a bigger nominal interest rate hike by the central bank, Capital Economics found that monetary policy is too loose in Hungary, the Czech Republic, Poland and Romania.

The cause for worry is that the respective authorities are apparently unwilling to change their easing stance, the study noted. 

While current loose policies do not endanger growth in the next 6-12 months, they put a shadow on the regionʼs prospects on the 2-3-year time horizon, observed Capital Economics. While the current acceleration of growth is good news for the region, it is not in anyoneʼs interest to artificially maintain the current high growth rates, the analysts warned.

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