How Central Europe will (not) follow the ECB

 - ECB monetary tightening had only an impact on Polish NBP decisions in the past… 
 - Nevertheless the past experience may not be a good guidance for the future, especially in the case of Hungary

With the surprisingly quick start of the monetary tightening in the euro area, we decided to review our Central European outlooks. Therefore we have decided to test the sensitivity of Central European central banks to the ECB policy since 1999 (see the box) . We came to the conclusion that, over this relatively short history (two incomplete economic cycles), the National Bank of Poland showed the greatest tendency to follow the ECB policy, while the monetary policy of the Czech National Bank, just like that of the National Bank of Hungary, was more independent. Our revised outlooks for Central European monetary policy are consistent with those conclusions. As far as the Czech Republic is concerned, we still anticipate a later launch of its monetary tightening – not until August 2011 – and slower paced rate hikes, just two 25 bps rate hikes by the end of the year, as opposed to three 25 bps rate hikes by the ECB. Regarding Hungary, we still expect stable rates until the end of the year. In Poland, by contrast, the increased aggressiveness of the ECB policy has made us bet on more rapid rate hikes. We anticipate an end-of-year rate of 4.50%, as opposed to our original forecast of 4.25%. The NBP should also join ECB with the interest rate hike this week.
Nevertheless, the question is whether the past developments may currently serve as a good guide for the future. Hence we need to analyse the historical contexts of the outcomes. In the past, the Czech National Bank, owing to its decent credibility, fairly conservative fiscal policy, and low external imbalances, could often afford a more eased policy than the ECB. This also applies today.

Both external and internal balances are very good, the koruna is strong, and, owing to fiscal restriction, the CNB can afford a longer period of super-eased monetary conditions. Hungary’s position is different. Although the ECB also had a relatively small effect on the decisions by the NBH, the reason was exactly the opposite. In the last ten years, Hungary was a country with persistently high government deficits, accompanied by a problematic increase in foreign debt. Therefore Hungary’s policy often had to be much tighter and go completely against the policy of the ECB. Nevertheless, over the last two years, Hungary’s situation has changed quite dramatically. Current account deficits have turned into decent surpluses, the government deficit is one of the lowest in Europe, and thus the country may afford more relaxed monetary conditions for a longer period of time.

Jan Bures
CSOB Prague