While another rating agency Fitch pointed its finger to Hungary it was February’s high inflation readings, which grabbed markets’ attention in Central Europe in recent days. Although in the Czech Republic and Hungary high headline inflation is due in part to the increased indirect taxes, three very obvious items are generally responsible for the regionally high inflation – petrol, food, and energy prices.
The acceleration of inflation (above targeted values) is thus based on factors that are beyond the control of Central European central banks, and this may calm those institutions to a great extent. In addition, increased inflation, which will hardly be offset by adequate wage growth, will actually lead to a decline in real purchasing power, and this should subsequently make itself felt in a slower improvement of demand and consequently slower economic growth.
That said, central banks in the region will not react to the latest inflation developments by any dramatic reversal of their policies and rather accommodate them. More likely, the most dovish members of the central banks’ boards may change the tenor of their statements or the most visible hawks will only repeat their inflation warnings. This was exactly the case of the CNB and MNB last week.
Nevertheless, markets – notably the fixed-income market– may not be necessarily calmed by the moderate reaction of central bankers. That said, yields and market interest rates may easily change, on the grounds of inflation being (just) above both the inflation target and the inflation forecast respectively.