CEE:
• No signs of monetary policy tightening in Poland, Hungary and Romania despite rising inflation and solid domestic economies.
The monetary policy council (MPC) of the National Bank of Poland (NBP) kept the key interest rate unchanged at 1.5 % last week (Figure 1).
According to the MPC statement, annual economic growth in Q4 2016 (to be released on Tuesday) was close to that recorded a quarter earlier (2.5 % y/y) implying to us a rebound in quarterly growth (from 0.2 % in Q3) and a rise in short-term momentum during the final quarter in 2016. This would bring GDP growth in the total of 2016 to 2.5 % (or slightly higher). We expect a further acceleration this year with GDP growth returning to around 3 % (y/y) that will remain driven by strong household consumption and a rebound in investment.
Inflation has picked up in recent months (0.8 % y/y in December) after prolonged deflation. The MPC says that inflationary pressure will remain contained by moderate growth in unit labor costs and the negative output gap in the domestic economy. Following a rise in the in the first months of the year, inflation will stabilize in the coming quarters. The MPC judges that the risk of inflation persistently running above the target in the medium term is low implying an unchanged monetary stance of coming quarters.
The minutes of the council meeting (24th January) of the National Bank of Hungary (NBH) state that GDP growth continued to pick up in Hungary. Q4 GDP growth (to be released this week) is expect at 0.7 % (q/q) by the market consensus (Bloomberg) implying an acceleration in quarterly GDP advance (after 0.3 % in Q3). The monetary council stresses increases in retail sales and industrial production, lending to SME and total employment and the continuing decline in the unemployment rate. The MPC expects economic growth of over 3 % both this year and next; an expectation that is not consistent with economic analyst’s judgement (Bloomberg median estimate: 2.6 % in 2017) and ambitious in our own view.
Inflation rose in December (1.8 % y/y) and the MPC expects it to reach the inflation target in the first half of 2018. The minutes of the meeting indicate a continuing monetary easing bias. It concludes that the council would stand ready to ease monetary conditions further using unconventional, targeted instruments.
In its policy meeting of 7th February, the board of the National Bank of Romania (NBR) left its policy stance unchanged including the unchanged main policy rate at 1.75 %, ongoing pursue of liquidity management in the banking system and maintaining the existing levels of minimum reserve requirement ratios on liabilities of credit institutions.
The return of inflation (‘reflation’) has been slower in Romania than in most of Central and Eastern Europe (Figure 2). In December, the consumer price index (CPI) declined by 0.5 % after -0.7 % (y/y) in the previous month. The trend is ascribed to the return to positive territory of the annual dynamics of fuel prices, while the overall index had been dragged down by applying the reduced value-added tax (VAT) rate to all food items although the effect of the VAT reduction has been diminishing.
In Q3 2016, real GDP growth decelerated from 1.5 % to 0.6 % (q/q). In annual terms, GDP growth was strongly elevated at 4.6 % in Q3 largely driven by one-off fiscal stimulus. Q4 GDP will be released on Tuesday and we expect an increase of 0.8 % (q/q). In the total of 2016, Romania’s economy would have grown by 4.7 %; one of the highest GDP growth rates in the CEE region. The latest figures reveal that retail sales growth remained robust though it has been decelerating (9.4 % y/y three months average in December) and industrial production accelerated mildly (2.2 % y/y) during Q4 2016. Economic growth is expected to moderate during 2017 as effects from fiscal impulses keep dissipating.
According to the NBR statement of last week, the projected annual inflation rate retains its upward path and return to positive territory during Q1 as the VAT effects keep fading. However, inflation will remain low due to new disinflationary supply-side shocks from price cuts for compulsory third-party liability insurance policies, scrapping of non-tax fees and the removal of the special excise duty on fuels.
The RON yield curve has gradually steepened during the last months (~20 basis points), while short-term effects of investors pricing higher political risks amid street protest in Bucharest against the government’s relaxation of anti-corruption legislation have been marginal. Romania maintains on of the highest real interest rates (key policy rate minus inflation rate) in the region providing a buffer for investors to be compensated for taking additional risk (Figure 3).
Author
Martin Ertl
Chief Economist
UNIQA Capital Markets GmbH
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