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The economies of Central and Eastern Europe (ECO) are rebounding very well in the synchronized global recovery from the coronavirus pandemic (COVID-19). But there’s a catch: Inflation has also skyrocketed, due to soaring food and fuel prices, disrupted supply chains, and everyone back in stores for. buy excessively at the same time as one year of pent- demand is released all at once.
Some central banks are now looking to fight inflation by raising rates, and those in the Czech Republic and Hungary are set to raise rates this week as the first EU regulators to respond to the price hike. But since it can take up to 12 months for a rate hike to take full effect, we won’t know if they make the right decision until much of next year. Some analysts argue that the rise in inflation is temporary and mainly due to global factors that cannot be affected by domestic rate hikes, and that there is still a lot of slack in the economy and that a Too rapid rate hikes could prolong the recession.
At the same time, the rate of inflation varies considerably from region to region, as bne IntelliNews reported in a recent DATACRUNCH on inflation. The same is true of the aggressiveness of the central bank’s rate hikes. The economic recovery may be in sync, but the central bank’s response has been syncopated.
Inflation in Eastern Europe soars, easing policies abandoned
Inflation has risen fastest in Eastern Europe and Eurasia, and this is also where the response began. The National Bank of Ukraine (NBU) got the ball rolling with the region’s first rate hike in March 50 bp after inflation climbed from all-time lows in 2020 of less than 2% to start this year at 6.1%.
As the heat map of inflation rates in the ECO shows, the NBU had covered itself in glory over the previous two years, crushing inflation and cutting rates aggressively as price increases plummeted. .
In the areas of the heat map in blue are the countries and months where inflation is low and under control. Those in green are where the rate has reached moderate levels and those in red are where inflation has become a problem.
Ukraine’s inflation was in the red zone at the start of 2019, but steadily declining and was in the blue zone in spring 2020, but in the first quarter of this year it was back in the red zone and the NBU decided to act.
He reversed his easing policy in March and followed suit with another sharp rate hike in April (100 bp) but then surprised the market by leaving rates unchanged in June. NBU Governor Kyrylo Shevchenko argued that inflationary pressures were already receding.
The problem was not as serious in Russia, and the Central Bank of Russia (CBR) had also brought inflation under control in 2020, but like elsewhere, it started to rise again in the first quarter and CBR Governor Elvira Nabiullina Ukraine followed two weeks later with a series of rate hikes, ending four years of easing. Nabiullina hiked in March (25 bp), April (50bp) and June (50bp). Unlike Shevchenko, Nabiullina is not convinced that inflationary pressures have been brought under control and is expected to make at least two more rate hikes this year.
Looking at the heat map, the inflation problem appears to be much less serious in the rest of the region. Most of central, south-eastern Europe and the Balkans have been in the blue zone for most of 2020, although inflation has risen slightly over the past two months to reach the green zone in all of these. country.
Turkey is the outlier with extremely high inflation, but it has experienced a currency crisis on top of all the other external shocks everyone has suffered in 2020, so it is no wonder that it is in such bad shape. state, because the effects of the devaluation were an additional and unwanted factor. inflation.
Inflation in the main regions (click on the legend of the regions to include / exclude it).
Low rates are increasing now
The following heat map shows the key monetary policy rates of central banks in the EEC region and the differences between the blocs stand out. All central European countries have zero or just above zero rates and have had them there for well over two years in most cases.
Southeastern Europe and the Balkans have higher rates, but all rates (except Turkey) are still modest and in the region, only Moldova had high rates for its effective fight against l ‘inflation.
Across Eastern Europe and Eurasia, interest rates are much higher, as all of these countries were struggling with high inflation. Once again, Ukraine’s huge success in lowering inflation rates in 2019, allowing the NBU to cut interest rates quickly, is obvious. But for most other countries (except Russia) the easing has been relatively modest.
That is likely to change now, as more countries brace for rate hikes that kill growth. It’s clear why banks think this is necessary when looking at real interest rates: the difference between the inflation rate and the policy rate.
Preferential interest rates in major regions (click on region legend to include / exclude it).
Real rates turn negative
If the central bank’s key rate is higher than the inflation rate, a bettor can simply deposit money into a bank deposit and make a profit. But if the inflation rate exceeds the policy rate, the value of your bank deposit will slowly be eaten away by negative real interest rates.
For example, in May 2020, the monetary policy rate in Russia was 5.5% but inflation was only 3%, so the real effective rate was positive at 2.5%. But by May this year, inflation had climbed to 6%, while the central bank had only raised rates to 5.5%, meaning the real effective rate was -0.5%. , and deposits are now losing money.
The third heat map is real interest rates (monetary policy rate minus the inflation rate) and this paints a very different picture from the previous two heat maps.
Inflation is high in Eastern Europe and Eurasia, as are interest rates. The result is that interest rates are significantly higher than inflation in the blue zone and therefore this restrictive policy should slowly lower the rate of inflation – as it has done in several cases, but not all. From this point of view, the whole region east of Minsk is doing the right thing, even though the region is slowly sliding from the blue zone to the green one, where inflation and policy rates are balanced.
The situation in South-Eastern Europe is much more balanced. Inflation isn’t that high there, but neither are interest rates and the two are much more balanced, which should allow for faster growth. However, the heat map also shows that the situation has changed rapidly over the past two months as inflation rises and brings these countries into the red zone, where inflation is much higher than the policy rate.
But the real surprise is in central Europe, which is a rash of red. Policy rates are all close to zero in Central Europe, but this means the region is more sensitive to even relatively small increases in inflation. The heat map suggests that the region’s central banks have been slow to raise rates, but the pressure to tighten monetary policy has now become overwhelming, especially last month, as all countries in the region are now deeply in it. the Red. Hungary’s central bank is expected to hike rates on June 22 – making it the first in the European Union to do so since the start of the pandemic – and analysts predict that the Czech National Bank will follow on June 23.
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