CEE stuck between geopolitics and deflation fears
The continued concerns over the geopolitical situation in Ukraine, the fear of an outright Russian invasion of Ukraine and the Russian counter-sanctions, especially on imports of certain food and agricultural products, have unnerved investors and the central and eastern European (CEE) currencies have had quite a stormy month.
The Russian counter-sanctions on imports of certain food and agricultural products have raised concerns about deflation in CEE, as European food exporters are now dumping their products in Europe rather than exporting them to Russia. This is likely to put further downward pressure on prices. Poland, Hungary, Romania and Bulgaria already have deflation and the Czech Republic is inching closer.
Naturally, this has increased market expectations - and rightly so in our view - of monetary easing across central and eastern Europe. Hence, in our view, it is becoming more and more likely that the Polish central bank will cut interest rates to curb deflationary pressure and we believe the Hungarian central bank is likely to continue its ongoing rate cutting cycle. Furthermore, we think it is increasingly likely that the Czech central bank will lift the 'floor' under EUR/CZK to fight deflation.
In our view, the increased likelihood of monetary easing across CEE will continue to put depreciation pressure on the CEE currencies over the next three to six months but more than is currently priced by the markets. We believe this will be even more important than the renewed geopolitical tension, although this risk should not be ignored. In our new FX forecast we have revised our forecast for the CEE currencies in a more negative direction.
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