Czech and Hungarian central banks risk slowing rate hikes too soon

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BUDAPEST — The Czech and Hungarian central banks, which last June became the first in the European Union to launch steep rate hikes to fight inflation, surprised investors this week by appearing ready to hold back, fearing a stifle economic growth.

Analysts believe that the two Central European central banks could fall behind the curve and weaken their currencies if they slow the pace of rate hikes too soon.

This week, top policymakers at both banks made dovish comments just days after surprisingly strong inflation data was released in both countries, triggering massive sales of kroons and forints and prompting the Czech bank to step in to bolster his currency.

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Czech year-on-year inflation jumped to 14.2% in April, the highest since December 1993, while headline inflation in Hungary accelerated to 9.5%, the fastest pace of increase since June 2001 despite price caps on fuel, energy bills and basic foodstuffs. Without these measures in place, inflation would be in double digits.

Price growth is expected to accelerate further over the summer, with businesses raising prices across the board, hoping that still buoyant consumer demand, helped by rapid wage growth, will absorb the blow.

Anyone can guess right now when inflation will peak and begin to slowly decline.

Nevertheless, National Bank of Hungary (NBH) Deputy Governor Barnabas Virag said on Thursday that: “We have passed the period of aggressive rate hikes” and that a more gradual approach and a prolonged cycle of hikes could be expected.

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His remarks follow Wednesday’s appointment of central banker Ales Michl as head of the Czech bank from July. Michl said at a ceremony to appoint him that he would offer rate stability for a period of time once he takes the helm.

The Czech central bank should nevertheless raise its rates by 75 basis points before taking over.

Jaromir Sindel, an economist at Citi in Prague, said a hike in June would put rates at a good level to start Michl’s term, but there was still a risk the economy might perform better than expected, creating new pressures on wages and inflation.

“If…the bank’s new board is safe from a further increase in the policy rate, this could…(lead) to a higher risk premium on the krone because the bank is behind on the curve.”

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Peter Virovacz, analyst at ING, said it was risky to slow the pace of rate hikes in Hungary as it runs large budget and current account deficits, while global central banks are firmly in tightening mode.

“The risk is that the market takes it badly and sells the forint because it doesn’t think inflation can be contained that way,” Virovacz said.

On Friday, the forint, under pressure from a rising dollar, fell to 385.30 against the euro, from 380.80 before Virag’s speech.


Since last June, the BNH has raised its key rate by 450 basis points to 5.4%, while the Czech central bank has added 550 basis points to raise its key rate to 5.75%. Hungary’s one-week deposit rate, which many investors consider the effective benchmark, stands at 6.45%.

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Poland has implemented increases of 515 bps to bring its key rate to 5.25%, but unlike its neighbors, it is not yet talking about a slowdown. Although it raised rates less than expected this month, its governor said it was “not a sign that rate hikes will end soon…and it’s not a sign that there is will have smaller increases”.

Announcements from Czech and Hungarian banks caught investors off guard as their economies are still booming. The Hungarian economy is expected to have grown by more than 8% in the first quarter, while the Czech economy grew by 4.6% in annual terms, beating forecasts and resisting the first impact of the war in Ukraine.

Still, a slowdown could be imminent, with demand for credit expected to slow in Hungary according to the BNH, which predicts GDP growth of 2.5% to 4.5% for 2022. The Czech central bank cut its outlook last week GDP growth for 2022 to 0.8% from 3.0%.

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BNH’s Virag warned on Thursday that an excessive drying up of the corporate credit market “must be avoided”, while supply chain disruptions and rising energy prices weigh on the manufacturing sector.

But Hungary’s widening current account gap, largely due to the rising cost of energy imports, has increased its vulnerability.

“External risks point to a delay in Hungary’s C/A adjustment unless a stronger correction in domestic demand and fiscal position offsets external factors,” Citigroup’s Eszter Gargyan said in a statement. a rating.

“We believe Hungary’s widening external gap leaves the HUF among the most vulnerable CEE currencies, calling for a cautious approach by the MPC as it calibrates the transition to more gradual increases.” (Writing by Krisztina Than; Additional reporting by Jason Hovet in Prague and Alan Charlish in Warsaw; Editing by Hugh Lawson)



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