CEE: Inflation prints to set next direction – ING

Elevated inflation prints seen in a number of CEE economies in recent weeks

Recent inflation prints in several Central and Eastern European (CEE) economies have been elevated, above both market expectations and central bank targets. This has prompted speculation about the future direction of monetary policy in the region. ING believes that these prints will set the next direction of monetary policy.

Inflation in CEE has been driven by a number of factors

The primary drivers of inflation in CEE have been the war in Ukraine, supply-chain disruptions, and the global energy crisis. The war in Ukraine has led to higher food and energy prices, while supply-chain disruptions have made it more difficult to get goods to market. The global energy crisis has also contributed to higher inflation, as CEE countries are heavily dependent on imported energy.

Central banks in CEE are likely to continue raising interest rates

In response to elevated inflation, central banks in CEE are likely to continue raising interest rates. This is because inflation is above their targets and they are concerned about the risk of it becoming entrenched. The National Bank of Poland (NBP) has already raised interest rates by 400 basis points (bps) this year, and the Czech National Bank (CNB) has raised rates by 375 bps. Other central banks in the region are likely to follow suit.

The pace of interest rate hikes may slow

However, ING believes that the pace of interest rate hikes in CEE may slow in the coming months. This is because the region is facing a number of headwinds, including the war in Ukraine, supply-chain disruptions, and the global energy crisis. These headwinds are likely to weigh on economic growth and make it more difficult for central banks to raise interest rates too aggressively.

The outlook for inflation in CEE is uncertain

The outlook for inflation in CEE is uncertain. The war in Ukraine, supply-chain disruptions, and the global energy crisis are all likely to continue to put upward pressure on prices. However, central banks are likely to continue raising interest rates, which should help to bring inflation down over time. ING expects inflation to remain elevated in CEE in the near term, but to gradually decline over the course of the year.