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Central and Eastern European countries determined to boost growth will avoid the risk of inflation in the near future

Central and Eastern European countries determined to boost growth will avoid the risk of inflation in the near future

Written by Krishtina Than and Jason Hovet

BUDAPEST / PRAGUE (Reuters) – Interest rate makers in central Europe appear largely prepared to counter the immediate spike in inflation and allow their economies to retaliate against the COVID-19 blockade brought on by strong domestic demand, investment and European Union funds. .

The eastern European Union member states, which have seen soaring labor markets and wage growth, are facing higher inflationary pressures than others in Europe.

This is because their economies are just starting to recover from the pandemic – resulting in the largest number of victims per capita from COVID-19 in the world in Hungary and the Czech Republic – and governments are trying to reopen stores, restaurants and other services quickly as much as possible.

However, Hungary’s headline inflation is expected to rise to around 5% in the second quarter, surpassing the target in Poland. In the Czech Republic, price growth will pick up again after falling to its target earlier this year.

But among these countries, analysts are ordering the Czech National Bank to start raising interest rates in 2021. Bank Governor Jerry Rusnoc told Reuters last week that the debate could start in August. But the bank also said it would not rush to raise interest rates.

In the case of Hungary and Poland, the authorities are more willing to allow inflation to rise further, said Peter Ferrovs, an economist at ING Bank in Budapest.

“There is a good chance that neither the Hungarians nor the Poles want to slow down growth, so after the epidemic we will see very tense economies in central and eastern Europe,” he said.

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“Rapid growth, high investment, with the authorities increasing the potential growth of GDP – to the detriment of higher inflation and worsening competitiveness, which could be offset by the weakness of Forint.”

However, he added that the Hungarian bank may have to raise the deposit rate for one week if the forint weakens too much.

Inflated budgets

Hungary and the Czech Republic have also increased their budget deficit targets to make way for more fiscal stimulus and strong monetary stimulus across the region, resulting in the fastest growth rate in the European Union before the pandemic.

“We have adjusted the budget for 2021 so that it can better serve to revive the economy, because we have launched intensive programs to renovate and build homes,” Hungarian Prime Minister Viktor Orban told state radio on Friday.

Urban nationalist, facing the tough challenge of being re-elected in early 2022, has long relied on economics to vote. His government has provided families with strong financial support over the past decade.

Hungary, which has implemented a vaccination campaign in the European Union with nearly 38% of the population vaccinated, has opened all of its stores and restaurant stands and plans to reopen hotels and most services in the coming days.

It is now focusing on a budget deficit of 7.5% of economic output, up from the previous 6.5%, while the Czech government expects a budget gap of 8.8% of GDP, compared to 6.6%, as previous expenditures are government wage growth. New origin. The record drop in income tax puts more pressure on the budget.

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Inflation in Central Europe

Meanwhile, central banks are still mitigating and ignoring deflationary risks.

The Hungarian National Bank, which faces 2-4% of exceeding its target range, left interest rates pending on Tuesday.

The bank considers the inflation jump to be temporary but said it would be watching closely in the second round to look for potential impacts. It also expanded its massive open-ended quantitative easing program.

However, on Tuesday, the central bank also called on the government to cut its budget deficit faster next year to avoid more inflation risks.

Inflation in Poland is also expected to exceed the central bank’s target of 2.5% plus or minus one percentage point in the coming months, but Governor Adam Glabinski said rates are likely to remain suspended until his term ends in 2022, to support the economy.

The bank claims that the rise in inflation will be temporary and supported by factors outside of monetary policy.

Get well soon

Employment is already improving in a region that suffered from severe labor shortages before the pandemic, while wage growth has continued at a strong, albeit not double-digit, pace as it was before the pandemic.

Families have accumulated their savings and there is great pent-up demand that can contribute to a speedy recovery.

We are relatively optimistic about growth prospects (in Central and Eastern Europe) in 2021 and 2022, and especially in 2022, despite the third wave. We expect economies to adapt well, and we expect a reasonable recovery in external demand. Arvind Ramakrishnan is an analyst at Fitch Ratings.

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Although first-quarter growth may be weakened by the stalemate, the Hungarian government expects 4.3% growth this year, indicating that growth may exceed 5% in 2022.

Poland expects 4% growth this year. According to the Ministry of Finance, the Czech economy is expected to recover at a slower pace of 3.1%. The Czech Republic plans to reopen stores, markets and some services from next Monday, while Poland will also open its shopping centers next week.

(Coded by Alan Charlich in Warsaw; edited by David Evans)