- The disinflationary trend in Central Eastern Europe (CEE) has come to an end. Allianz Trade expects inflation to pick up again and exceed central bank targets by the end of 2024 in Poland, Czech Republic and Hungary. Inflation in Romania has remained more stable.
- As a result, we expect a slowdown in the pace of the current easing cycles in the Czech Republic and Hungary, while Romania and Poland will wait until the end of the year to cut rates.
- In Turkey, inflation is expected to peak at over 70% this month before starting to decline to around 40% by the end of 2024. The CBRT will likely keep its policy rate on hold at 50% until inflation falls below this level by the end of the year. The first rate cut in Turkey is possible in Q4 2024.
The decline in consumer price inflation in CEE last year was larger than expected, mainly due to strong base effects, namely the sharp drop in food and energy prices after their rapid rise from 2022 to early 2023. However, latest data for April show a rebound in inflation in Poland (2.4% y/y, from 2.0% in March), the Czech Republic (2.9% y/y, from 2.0% in March) and Hungary (3.7% y/y, from 3.6% in March).
The reversal of the trend was mainly due to stronger food price growth; in Poland, this was partly due to the reintroduction of a higher VAT rate. In Poland and the Czech Republic, a role was also played by the rise in fuel prices, following the recent increase in global oil prices. Higher food and energy price inflation is also expected to continue for the rest of the year as the aforementioned base effects fade away. Meanwhile, in Romania, inflation has remained more stable; although it fell to 5.9% y/y in April, it was still the highest in the region.
Looking ahead, Allianz Trade expects core inflation to pick up again above central bank targets by the end of 2024: in Poland (to 4.6% y/y in December), the Czech Republic (3.7%) and Hungary (4.8%) and to remain elevated in Romania (at 4.7%). [1] Inflation is assumed to gradually decline in 2025 and return to the upper half of the target ranges, except for Romania, where this may take until early 2026.
Monetary policy in CEE is expected to remain cautious until the end of 2025, reflecting the inflation outlook, with central banks likely to keep real interest rates in positive territory. In addition to the above-mentioned rationale for the expected rebound in inflation, there are a number of other reasons for a cautious monetary policy stance in the CEE region in the coming quarters, including: the expectation of a more moderate easing cycle by the Fed and possibly also the ECB, uncertainty about oil prices in the wake of the ongoing Middle East crisis, and strong wage growth and loose fiscal policy in Poland, Hungary and Romania (these concerns are less evident in the Czech Republic). Moreover, Q1 economic activity indicators point to an improvement in the growth outlook driven by domestic demand (especially in the services sector), meaning that less monetary stimulus may be needed this year (to support economic growth). In this context, Allianz Trade expects the Polish central bank, which started the CEE easing cycle with two rate cuts in September-October 2023, to keep its policy rate on hold at 5.75% at least until Q3 2024 and then possibly cut it by 25bp in Q4 when the renewed pick-up in inflation comes to an end.
The Romanian central bank has yet to change rates, but is expected to cut its rate by 75bp in H2 2024, to 6.25% by the end of the year. The Czech Republic has cut its rate by a total of 175bp over the last six months, but is expected to slow its easing cycle with a further total cut of 100bp to 4.25% by end-2024. The easing cycle in Hungary has been the most aggressive so far, with seven rate cuts totalling 525bp since October 2023, but has already slowed down in
