During the pandemic, currency devaluation accelerated in the east-central European EU countries without the euro. How stable are the currencies of these countries now?
Ka fear of deflation. The advice was given these days by Peter Brezinschek, chief analyst at Raiffeisen Bank International (RBI) in Vienna. He referred to “the empirical evidence in many Central and Eastern European countries”. From 2014 to 2016, price change rates in Poland, Hungary, Slovakia, Romania and other countries in Eastern Central Europe were negative for more than three years – even more so than producer prices for consumer prices. Nevertheless, during that time the countries had begun above-average growth, accompanied by strong wage increases. “A negative effect of falling prices on purchasing decisions or a negative price / wage spiral could not be identified anywhere.”
Today the situation is different. While inflation is negative in the euro area, it has risen in the currency areas that belong to the EU but are not affiliated with the euro – beyond what the central banks wanted. In Poland, the largest economy in Central and Eastern Europe, inflation is 2.9 percent and thus above the target of 2.5 percent that is still being sought. Even if the recent slight decline suggests, in the opinion of the Commerzbank analysts, “that the long-awaited inflation-dampening effect of the pandemic is finally making itself felt”, they consider it possible that the hawks in the Central Bank Council are working towards interest rate hikes the old rate of 1.0 percent from the current 0.1 percent. This could give the zloty a boost. Since its recovery from the corona shock, the currency has been hovering between 4.38 and 4.42 zlotys against the euro for about six weeks, but recently at the upper level.
From the Czech central bank, which is keeping its key interest rate at 0.25 percent, a different tone was recently heard despite rising inflation of 3.4 percent in July. Councilor Tomáš Holub believes that key interest rates will remain stable until the end of 2022. The central bank, which is considered to be the most independent in Central and Eastern Europe, is concerned about the government’s debt policy in Prague. On Wednesday she approved an extra payment for Czech pensioners. Each pensioner should receive a one-time payment of 5000 crowns (around 190 euros). If Parliament approves it, this will cost the state the equivalent of 550 million euros. Together with the income tax cut planned for the election year 2021, revenues of more than 2.8 billion euros would be lost, which Central Bank Governor Jiří Rusnok criticized. He is concerned that this will lead to longer-term government revenue shortfalls and, consequently, higher indebtedness. The krona recently trended somewhat lighter, around 26.30 kroner per euro, after exchange rates of less than 26.10 kroner per euro in mid-August.
Rating agency threatens Romanians
In Hungary, the economy slumped 13.6 percent more strongly than expected in the second quarter and more deeply than in neighboring countries. The ING analysts found this “shocking”. Even before that, the forint only knew one direction: downwards. Since the beginning of August it has weakened from 344 to 357 forints per euro. The DZ Bank blames the growing concerns about growth “with a simultaneous significant increase in price pressure” for the uncertainty of the Hungarian national currency. Another reason that is often cited is the lack of confidence on the part of the markets in the willingness of the central bank to raise interest rates again at some point. In July, annual inflation was 3.8 percent, after 2.8 percent in June. Due to the recession, the budget deficit and the central bank’s bond purchase program, which can be based on swap agreements with the ECB and other central banks, the RBI experts lowered their forecast slightly to 355 instead of 350 forints per euro at the end of the year.
In Romania, the political crisis did not worsen at the beginning of the week because the opposition PSD did not bring enough MPs into parliament to vote at all for the announced vote of no confidence in the minority government. However, financial troubles threaten in the course of the budget consultations currently taking place, because the PSD (before local elections at the end of September and the parliamentary elections at the turn of the year) insists on a pension increase of 40 percent and demands “risk surcharges” for teachers and other school staff. The government had recently limited this to 14 percent. For this reason, analysts have long warned of latent dangers to the long-term stability of the national budget. Even before the corona pandemic, it was so deficient that the EU Commission sent out reminders. In the event of a sharp rise in pensions, however, bank experts are now counting on the previously avoided devaluation of the state rating to a “non-investment” status.
In the meantime, the ECB extended its euro credit lines granted to the central bank this week. They will now run until the end of June 2021, six months longer than previously agreed. The inflation rate in July was 2.8 percent, the Romanian currency Leu has fallen from 4.832 to 4.842 Leu per euro since the beginning of August.