Central European monetary authorities sit tight on rate - Analysis


Leading central banks among the European Union’s new member states ended their monthly meetings Wednesday by leaving rates on hold as they sized up the economic fallout from the global credit crunch and renewed inflationary pressures.

Even Hungary, which analysts had predicted would trim borrowing costs by 25-basis points, held fire, keeping its benchmark rate unchanged at 7.5% in the face of signs of a pickup in inflation. Indeed, a sudden pickup in both oil and food prices is threatening to play havoc with the inflation targets of monetary authorities across the Central and Eastern European region. Combined with this, central banks around the world have been trying to weigh up the economic implications of the international credit squeeze triggered by a surge in US mortgage defaults and which sent world markets tumbling in August.

On Wednesday Poland joined the other key national banks in Central Europe by leaving rates on hold. However, analysts expect signs of growing inflation to result in the monetary authorities in Warsaw hiking the cost of money possibly as early as next month. “The reason that the National Bank of Poland did not hike today was because of the fairly strong zloty and the election victory of the reformist Civic Platform,” said Lars Christensen, senior analyst with Danske Bank. To be sure, Wednesday’s Polish central bank meeting came as the fiscally conservative Civic Platform and its leader Donald Tusk move to piece together a new government following their electoral success early this month.

Likewise, Slovakia also left its benchmark rate on hold but revised up its inflation outlook for the nation to 1.6% in December compared to a previous 1.5% forecast. The bank expects higher energy and food prices to result in Slovakia’s inflation rate hitting 2.3% in 2008. This compared to a previous 2008 forecast of 2%. Complicating Slovakia’s monetary outlook are its ambitions to join the euro in January 2009 and the country’s consequent moves towards interest rate convergence with the 13-member eurozone. At 4.25%, interest rates in Slovakia are only marginally above borrowing costs in the eurozone, which currently stand at 4%. However, both the economic and political establishment in Bratislava is confident that Slovakia will be able to meet the strict rules for euro membership with the strong koruna helping to dampen inflationary pressures.

The Czech Republic’s strong koruna also helped the monetary authorities in Prague to hold fire on rates this month, but with some analysts believing that the nation’s central bank could deliver a modest rate rise before the end of the year. Rates in the country currently stand at 3.25%. Poland, the Czech Republic, Hungary and Poland were four of the ten largely Central European nations that signed up to EU membership in May 2004. (m&c.com)

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