Central Europe’s policymakers double down on hawkish message

By Jan Lopatka

PRAGUE (Reuters) – Central bankers across central Europe have doubled down on their hawkish policy messages in the past two weeks in a bid to persuade investors to ditch bets that they will soon begin an easing cycle, and their message is starting to gain traction.

Their policy warnings come despite a European market downturn in the wake of Credit Suisse’ demise, which raised bets that global banks would begin to ease monetary policy.

As central Europe’s central banks were faster than their major peers to hike rates, they had also been expected to lead the way in easing. While this may still be true, it now looks like happening later than previously thought.

But that narrative is changing, with factors such as tight labour markets and solid wage growth across the region playing their part, and investors are starting to catch on.

“High wage pressure will keep core inflation elevated and may lead to delayed monetary easing compared to current expectations,” Erste Bank said in a note on Thursday.

The Czech central bank, which had been seen as dovish under its new leadership and has refused to hike rates since last June despite calls to do so from its own monetary department and outside analysts, has in fact firmed up its hawkish messaging.

Its Hungarian counterpart, which some had thought would start easing in March, has instead pledged to keep rates unchanged for a prolonged period to quash inflation expectations – price growth in Hungary may have dipped in Februarty, but it remains eye-wateringly high 25.4%.

Poland’s central bank held rates steady this week and Governor Adam Glapinski said it was still ready to hike if needed, although rates would not need to rise more if economic developments follow its current outlook.

The Czechs, referring to strong January industrial wage data, warned on March 29 that the market was prematurely pricing in rate cuts, and Governor Ales Michl said a hike may still be on the cards in May if the risk of a wage-price spiral grows.

Graphic: CEE rates, https://fingfx.thomsonreuters.com/gfx/mkt/gdvzqnqbbpw/CEE%20rates%20vs%20ECB.png That message was underlined on Thursday when February data showed industrial wage growth in the double digits.

In the market, forward rate agreements are not pricing in the chance of a Czech rate hike, but they have risen from this year’s lows, even if they are still pencilling in easing from the third quarter.

“Upon nomination, markets read the current…board as dovish-leaning,” JP Morgan said.

“Yet, what we see now seems far removed from that premature assessment. The message from the board is as hawkish as could be.”

That message of interest rates being kept “higher for longer” has been pushed by two new Czech vice-governors with prior board experience – Jan Frait and Eva Zamrazilova.

The argument is that policy had been loose both at home and abroad for too long over the past decade, and that would lead to higher equilibrium interest rates ahead.

While this does not mean the Czech repo rate will necessarily stay at 7%, it does suggest resistance to any rapid loosening.

JP Morgan said the risks to its call that rates would begin falling in August were now “severely skewed for a later start”.

Goldman Sachs is penning in no change all year.

“We do not expect a rate hike,” it said after the Czech policy meeting last week. “Equally, however, we think the bar to cutting rates is also high,” it said.

Hungary on similar path

That could put the focus on Hungary, which has the European Union’s highest base interest rate at 13%, and an 18% quick deposit rate to underpin the forint and fight inflation.

While there had been some market speculation the National Bank of Hungary could easing policy last month, the rhetoric at the March 28 meeting instead consolidated the outlook more towards June, giving some support to the currency.

“The NBH has made it clear that priced-in rate cuts are not on the table at the moment, which should keep FX carry by far the highest in the region,” ING said in a note.

Graphic: CEE inflation, https://fingfx.thomsonreuters.com/gfx/mkt/znpnbjbnjpl/CEE%20inflation.png The Polish central bank also struck somewhat hawkish tones at its news conference on Thursday after holding rates steady.

“The NBP president did not mention autumn 2023 (for cuts) by himself this time. It can be considered a hawkish accent,” Bank Pekao said in a note.

Romania’s central bank left rates unchanged on Tuesday and said inflation may come down faster than previously thought. But it said economic activity dropped less than expected, and analysts believe it will not move this year at all.

“The first interest rate cut probably won’t arrive until early 2024 once policymakers feel more confident that price pressures have eased,” Capital Economics said in a note.

(Reporting by Jan Lopatka, additional reporting by Pawel Florkiewicz in Warsaw and Gergely Szakacs in Budapest; Editing by Hugh Lawson)