East Europe to resist global rate-cut push with economies strong
As the world’s central banks loosen monetary policy to support growth and rekindle inflation, central banks in Eastern Europe reckon the best option for now is to do nothing.
The four deciding on interest rates this week have gone in different directions this year, with the Czechs raising interest rates, Poland and Romania holding steady and Serbia cutting, Bloomberg reported.
But while the region’s economic expansion is slowing, it still exceeds growth in the developed world and consumer prices continue to rise. That gives rate setters time to gauge the effects of global headwinds before adjusting.
Poland, which has kept its benchmark rate at a record low since 2015, will probably extend the pause after headline inflation slowed for a second month.
It strengthens central bank Governor Adam Glapinski’s view that borrowing costs should stay on hold for the foreseeable future, even as the labor market remains tight and economic growth stays strong.
The most recent data showed softer-than-expected economic activity, signaling growth weakening in the third quarter, according to Piotr Kalisz and Cezary Chrapek, economists at Citigroup Inc.’s Polish unit. “Moreover, flash inflation for October surprised on the downside.”
The Romanian central bank, which last time raised rates in May 2018, is expected to keep the benchmark unchanged with economic expansion poised to slow.
Domestic factors including still-robust inflation, a widening current-account deficit and lose fiscal policy could warrant monetary tightening, but the bank may stick to regulating money-market liquidity to adjust monetary conditions.
It also wants to avoid excessive capital inflows that could fuel unwanted currency appreciation.
The Czech central bank, which raised rates eight times in just over two years, is trying to assess the impact of the euro-zone slowdown as it decides whether more hikes are needed. Strong household spending is keeping inflation above target, but the manufacturing industry is already feeling weaker demand from abroad.
The bank has said it will discuss a potential hike in November, but the most recent comments signaled borrowing costs are more likely to stay stable.
“The worsening external outlook will be an argument for the central bank not to hike, while the strong domestic demand, higher wage growth and inflation, and a weaker koruna are all reasons not to cut rates,” Komercni Banka analysts said.
The Serbian central bank will weigh slowing price growth and a below-target economic expansion against the risks of capital outflows when deciding whether to reduce borrowing costs again after two surprise cuts this year. Policy makers may prefer waiting with further monetary easing to make sure it doesn’t lead to dinar weakening, especially after appreciation pressures softened last month.