Eastern Europe at the top of the tariff take-off
Strong recovery underway on the back easing restrictions and strong global demand.
Inflationary pressures leading to a change in the discourse of the central bank.
CEE FX to benefit from CB warmongering.
Central and Eastern European countries are bracing for a rapid recovery after accepting the third wave of COVID. In the Czech Republic, Poland and Hungary, daily cases have returned to autumn lows as restrictions have worked hand in hand with warmer weather and the rollout of vaccines. On this last point, Hungary stands out, as the early decision to use the Russian Sputnik vaccine increased vaccination coverage to the same levels as in the United States and the United Kingdom, with Poland and the Czech Republic approaching of the EU average. This allowed for a relatively early easing of restrictions in Hungary, leading to a strong rebound in inactivity, but a similar picture is also emerging in Poland and the Czech Republic (graph 1).
In addition, countries experience consistently high inflation. There are clear signs of overheating in the manufacturing sector in Poland, where supply constraints and labor shortages are limiting production. Core and headline inflation is now above the central bank’s target range of 3.9% y / y (Chart 2). In addition, the recent rise in commodity prices in the world has an accentuated effect on inflation in the CEECs, as they have a significantly higher weight for goods in the consumer price indices, compared to the area. euro or the United States.
While expansionary monetary policy and negative real rates have supported the recovery, increased inflationary pressures have made local central banks more belligerent. The National Bank of Hungary was once the most accommodating of the bunch, but Vice Governor Virag surprised markets this week with a call to prepare for a rate hike, and the Czech central bank is already targeting a rate hike in June. The Polish central bank remains divided on the issue, but the most hawkish members are already calling for a hike this summer. The dividend policy committee makes us a bit more hesitant on the upside for the PLN versus the other two, but overall we are seeing stronger EEC currencies.