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Eastern European central banks may ignore ECB signal to raise interest rates

Eastern Europe’s central banks will probably keep interest rates unchanged in the coming weeks as they try to bolster an economic recovery, ignoring signs of accelerating inflation and signals that the European Central Bank will raise its benchmark rate.

Czech policy makers will leave rates unchanged today and the central banks of Hungary and Romania will follow suit next week, according to all seven analysts in a Bloomberg survey. Four of the seven also expect no change in Poland at a policy meeting on April 4-5. Ten of 15 economists forecast no change when Russian central bankers meet on March 25.

Central banks around the world are struggling to contain inflation as food prices advance and the price of oil rises amid turmoil in the Middle East. ECB President Jean-Claude Trichet said on March 3 that an increase in the main rate from a record- low 1 percent is “possible” in April.

“Many of these central banks wouldn’t react to an inflation shock like they did in the past,” Peter Attard Montalto, a London-based economist at Nomura International Plc told Bloomberg. “They are looking at growth more than the ECB. That means a slower hiking cycle than the market was pricing in.”

Money markets in the region show that investors have scaled back wagers on how far borrowing costs will rise. Forward-rate agreements used to lock in interest costs in nine months from now indicate Polish rates will increase 86 basis points by year- end; two weeks ago they predicted 1.01 percent. The Polish reference rate is 3.75 percent.

Totally overpriced

Hungarian contracts show about a quarter-point increase, compared with rate bets of 40 basis points two weeks ago, while contracts for the Czech Republic signal an increase of 71 basis points, compared with 78 basis points two weeks ago. Hungary’s base rate is 6 percent and the Czech two-week repurchase rate is 0.75 percent.

Nomura recommends selling these contracts to benefit from the decline. “The market is totally overpriced in terms of the amount that the central banks are going to hike,” Montalto said.

The central bank board in Prague will publish its rate decision at 1 p.m. as it weighs the effects of an increase to quell price growth during an economic recovery against a possible ECB move, which would widen the differential between the main Czech and ECB rates and boost the koruna. The Czech inflation rate rose to 1.8 percent in February, below the central bank’s 2 percent target.

The Ceska Narodni Banka has kept the two-week repurchase rate at a record low since May, a quarter-point below the ECB’s benchmark. Czech policy makers voted 4-3 in February to leave the rate unchanged. It will rise to 1.25 percent by year-end, according to the median forecast in the Bloomberg survey. The koruna has gained 2.56 percent this year on expectations of higher interest rates.

ECB Relationship

“The market appears to be thinking we will automatically follow the ECB,” Czech rate setter Pavel Rezabek told Bloomberg News on March 15. “The relation between the ECB and Czech monetary policy is not that automatic.”

In Poland, which avoided a recession throughout the global crisis, the central bank cited “uncertainty regarding economic growth,” for holding rates in March, according to minutes published on March 17. The bank expects the economy to expand 4.5% this year, while Hungary’s central bank predicts 3.1% growth for its gross domestic product.

“The economies are still in after-recession hangover and the Polish economy is not as red hot as it was” before the financial crisis, Miroslav Plojhar, a London-based economist at JP Morgan Chase Bank, told Bloomberg. “I don’t think inflation is a big problem.”

No Choice

The Russian central bank is also considering borrowing costs tomorrow. It will probably leave the key refinancing rate unchanged, after lifting rates by a quarter-point on Feb. 25. Bank Rossii’s refinancing rate stands at 8%.

Poland’s inflation rate held steady at 3.6% in February, while Hungarian consumer prices rose an annual 4.1% in February.

The Narodowy Bank Polski raised borrowing costs in January for the first time since June 2008, and left them unchanged in March after the unemployment rate rose to 10-month high. Polish rates will rise to 4.25% from 3.75%, according to the median of seven analysts’ forecast in a Bloomberg survey.

Though policy makers “have no choice” other than to raise rates at the first sign that higher food and fuel prices are feeding through to wage demands, markets are overestimating the scale of the Polish tightening, central bank Governor Marek Belka told the central bank-run Obserwatorfinansowy.pl website on March 22. “Like a good physician, the central bank shouldn’t administer medicine beyond the normal dosages,” he said.

Policy makers in Budapest last raised the country’s benchmark a quarter-point to 6% in January. They left rates unchanged last month after three consecutive increases, citing a slowing of inflation, a decline in wages and an improved risk perception, minutes published on March 18 showed. The Bloomberg survey predicted Hungarian rates will stay on hold throughout the year, according to the median estimate.