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Inflation slows in EU’s east as economies feel pain

Inflation slowed faster than expected in both Hungary and the Czech Republic in October, signaling price pressures are moderating across central and eastern Europe as economies take a hit from the global crisis.

 

Investors have dumped assets in the developing region, which finds itself ever more pinched by the credit crunch and falling euro zone demand, causing exports to slow, firms to cut jobs, and companies and households to find it harder to borrow. Hungary’s inflation slowed to 5.1% in October, its lowest since August 2006. Czech price growth slowed to 6.0%, from 6.6% in September, bolstering the case for lower interest rates after a bold cut last week. Lithuanian inflation on Tuesday also fell to 10.5%.

Only Romania broke the trend, reporting price growth rose unexpectedly to 7.4% in October, from September’s 7.3%, due to food costs and a leu (RON) currency hit by cuts in its debt rating to “junk” status. “Within central Europe the inflation outlook has improved significantly over the past couple of months,” said Gillian Edgeworth, analyst at Deutsche Bank in London. “Lower energy prices, better harvests, lower global food prices and growth all bode well for central bank targets. The key concern is currency performance, as was clear in Hungary when a weaker forint translated into a 300 bps rate hike.”

Analysts expect Poland’s inflation to slow to 4.2% from 4.5% in September, in data due on Thursday. Slovak numbers this week are also expected to show slowing growth. A $25.1 billion rescue package from the International Monetary Fund and the European Union has helped Hungary stave off the financial crisis and the forint has stabilized, but it will take longer for the bond market to revive. Its central bank hiked rates to 11.5% in late October to shore up the forint currency and local markets as foreign investors offloaded Hungarian assets on concerns over the financing of its external debt. Hungary’s economy is expected to slide into a recession next year, with real wages and household consumption falling.

 

 

GROWTH OUTLOOK WORSENS

 

Growth is expected to slow sharply across the region, which is expected to lead to an easing of monetary policy, although at a different pace in the individual countries. On Thursday, Slovakia cut its main rate by 50 basis points to 3.25%, mirroring a move last week by the European Central Bank, with which Bratislava must be in line when it joins the euro zone on January 1.

The Czech central bank (CNB) cut rates by a much more than expected 75 basis points -- their biggest move in more than six years and bringing rates to an EU low of 2.75%. Poland’s central bank Governor Slawomir Skrzypek, viewed as on the dovish wing of its 10-strong council, also said last week the bank should consider cutting rates for the sake of economic growth and financial stability.

In Hungary, central bank rate setter Péter Bihari told Reuters the bank would have to wait for sentiment to improve before it could start lowering rates from what is the highest level in the EU. “The weaker exchange rate is still a risk factor and until volatility recedes the central bank will refrain from cutting rates. Despite the favorable inflation data I expect the first rate cut only next year,” said Zsolt Kondrat at MKB.

Romania’s central bank is also expected to stay cautious. “Inflation is way above expectations and that means that it will be very hard for the central bank to cut rates (in January),” said Nicolaie Alexandru-Chidesciuc at ING Bank in Bucharest. “This could happen in February, at the earliest, depending on the RON exchange rate.” (Reuters)