Friday's EMEA Weekly

Inflation in most CEE countries, especially Poland, Hungary and the Czech Republic, is moving closer to deflation. Given that supply side inflationary pressures have faded and weak private consumption in all three countries means an absence of any demand-pull inflation pressures, inflation keeps falling and is now well below the central banks’ inflation targets. We expect inflation to fall below 1% in the coming months in Poland, Hungary and the Czech Republic. This only means that in our view, the central banks will remain dovish and further easing seems most likely also in the context of the dovish European central bank and falling inflation in all of the eurozone. Even in Poland, we think that the Polish central bank will turn more dovish than it has been recently. In Hungary, further rate cuts are expected while the Czech central bank has approved FX intervention this week to ease monetary policy further.

Czech central bank announces FX interventions
The Czech central bank has today announced that it will intervene in the FX market to weaken the CZK in order to loosen monetary policy further and bring inflation back to the 2% inflation target. The move was surprising but not completely unexpected. We have been calling for FX interventions for almost a year. Right after the announcement the CNB went directly to the FX market to buy euros to weaken the CZK. Read more in our Flash Comment – CNB intervenes directly on FX market, from 7 November 2013. At the press conference, the CNB confirmed that it will ‘intervene as long as needed’, meaning until inflation starts to pick up. Looking at the CZK outlook, we expect it to trade close to the EUR/CZK 27 in a fairly narrow range for at least six months or more.

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