This week has brought the much-anticipated rate hikes in Central Europe, with Hungary first and then the Czech Republic raising their key interest rates. The attitudes of both central banks in the past could not be more different, yet they are so similar in their current reaction patterns.
Both have announced a cycle of key interest rate hikes. The Czech National Bank (CNB) increased its key interest rate for the first time in the last 16 months, while the Hungarian National Bank (MNB) did so for the first time in the last 10 years; although the MNB played around with other policy instruments in recent years and de facto already tightened its stance in a subtle way recently. This is because certain challenges are similar.
In this respect, Hungary and the Czech Republic are more likely to see further decisive interest rate hikes in H2 2021, which means that we expect further interest rate hikes in the Czech Republic and Hungary well in line for the time being. Especially since, in the case of Hungary, it has to pay more attention to the global environment and exchange rate conditions. And in this respect, the MNB has certainly created room for Fed tapering risks.
Coming to the outlook in more detail. Both the CNB and MNB are pointing to upside inflation risks and that key rates are expected to rise. The key rate could even rise in each of the remaining four CNB meetings in 2021 given the CNB guidance, though we expect a measured rate hike cycle.
In the case of Hungary, where inflation risks are possibly a bit more elevated, the MNB clearly expressed its readiness to adjust the policy stance on a monthly basis, and for as long as the inflation development requires so. The monthly adjustment path will continue until inflation returns to the 3+/-1% central bank target in a sustainable manner.
In our opinion, the MNB will focus on core inflation rather than the headline, which will allow it to increase by only 15 basis point increments in August and September after 30 basis points in June, and then stop at 1.2%. This means that our year-end call stands at 1.2% for the base rate.
In order to stabilize longer-term interest rates in the meantime, the Monetary Council will continue to maintain the government securities purchase programme with a sustained market for the time being. A further assessment will be possibly done closer to the HUF 3,000 billion limit.
More measured approach
In our view, the upcoming CNB hiking cycle will be gradual, similarly to 2017 in the first place. We think the CNB will take, in comparison, a more measured approach, delivering one additional rate hike worth 25bp until year-end, pushing the key rate to 0.75%. Two additional hikes shifting the key rate to 1.0% remain a possibility, in case of inflation upside surprises.
Indirectly, the central banks in the Czech Republic and Hungary could then also put pressure on the central banks in Poland and Romania to raise their key interest rates more quickly than currently intended. Both central banks are possibly not willing to hike in 2021 yet.
However, there are important differences here. Poland has established a rather comprehensive QE programme that is more in line with the ratios of QE programmes in established markets. Here, too, this must be scaled back – more in the sense of the developed markets QE playbook – before rate hikes are possibly on the agenda. Romania's central bank is clearly more flexible here, depending possibly a bit on the MNB and CNB course in 2021.
In the long term, however, the interest rate paths of CNB and MNB will probably differ. We see the CNB clearly willing to pursue an active-restrictive monetary policy course well beyond 2021. In Hungary, we see the outlook as somewhat less clear. Here the current interest rate cycle could soon end above levels of 1.2% (our 2021 year-end forecast), e.g. around 1.5% or marginally higher.
In recent years, we have come to know the MNB as a less active monetary policy player than the CNB and more as a player in the overall economic policy setup. Next year, with the economic recovery reaching a high pace, inflation still above 2%, continued loose fiscal policy and COVID-19 related risks hopefully abating, we expect a more aggressive CNB approach. The key interest rate should close next year and the year 2023 at 1.75% and 2.25%, respectively. Overall, there will be a clear focus on conventional monetary policy tools – possibly flanked by additional macro-prudential tools.
In the spirit of broader economic policy engagement, the MNB will continue its QE programme for now. But also, in Hungary the period of QE might have been rather short compared to the established markets. We currently think that the MNB will roughly follow the ECB in its tapering considerations or, in this case, the reduction of the PEPP in 2022 – room for manoeuvre in the context of the looming Fed tapering risks has just been created.
However, we think that the MNB could also continue to use is QE flexibly and more unconventional monetary tools if needed in the future, whereas the CNB has never been "tempted" to do so and certainly does not want to signal (indirect) fiscal policy support with the outlined monetary policy course for 2022 and 2023. In this sense, the monetary policy history in Central Europe could rhyme after all, even if the MNB is currently moving well in sync with "the CE Hawk" CNB for the time being.
Gunter Deuber is the Head of Research at Raiffeisen Bank International in Vienna