Central and Eastern European interest rates set to decline amid inflation drop

Central banks in Central and Eastern Europe are poised to ease monetary policy as inflation rates begin to fall, signaling a region-wide trend of decreasing interest rates

editor: REMIX NEWS
author: Grzegorz Adamczyk
Building of the National Bank of Hungary. (MTVA/Csaba Jászai)

The Czech National Bank is leading the charge with the most significant planned rate cuts following the slowest economic recovery from the pandemic among its peers.

The National Bank of Hungary continued its rate-cutting cycle in March, while Romania remains the last country in the region to hold steady interest rates, though it is likely to start reducing rates soon, according to Jakub Rybacki, the expert from the Polish Economic Institute (PIE).

The Czech National Bank (CNB) is continuing its monetary easing cycle, with the board executing its first interest rate cut in December by 0.25 percentage points, followed by two more cuts in February and March (by 0.50 percentage points each). The current interest rate stands at 5.75 percent. Initially, CNB justified the cuts by forecasting a return of inflation to target levels. However, the bank’s latest forecasts suggest a slower pace of inflation decline than previously predicted, highlighting higher inflation expectations, a weakening Czech koruna, and a strong increase in service prices as accelerating factors.

Analysts agree that the CNB will persist in its easing cycle and is expected to further reduce rates by 0.50 percentage points at its May meeting, with market expectations pointing towards a reduction to 3.5 percent by the end of 2024. This reduction in interest rates is expected to stimulate the Czech economy, which is still performing below pre-pandemic levels.

The National Bank of Hungary (MNB) has made the most substantial interest rate cuts. In March, the Bank’s Council reduced rates by 0.75 percentage points, bringing the main rate down to 8.25 percent; it had been at 13 percent in October 2023. Since January 2023, inflation has decreased from 25.7 percent to 3.7 percent year-over-year. The MNB predicts that the inflation rate will range between 4.5 percent and 5.0 percent year-over-year in the second half of the year and should stabilize at the bank’s target of 3 percent (plus or minus 1 percentage point) by 2025.

Meanwhile, Romania has kept its interest rates unchanged but is expected to change course soon. Since the beginning of 2024, Romania has reported the highest inflation rate in the EU, with a 7.2 percent year-over-year increase in February. The National Bank of Romania (NBR) projects that inflation will only reach the upper deviation band from its target (3.5 percent) by the end of 2025, with persistent inflation driven by a significant increase in core prices, reflecting a GDP growth of 1-2 percent higher than the economy’s potential in 2023.

Consequently, Romania, the last country in the region to maintain its rates at 7 percent since the end of the hike cycle in early 2023, is expected to begin its easing cycle in May. The consensus among Focus Economics forecasts suggests a reduction in rates by approximately 1.25 percentage points by the end of 2024.

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