ING’s Frantisek Taborsky highlights that Central and Eastern European FX and rates have seen some relief despite elevated energy prices. Regional central banks currently treat the Gulf-related energy spike as a supply shock and prefer to wait, with no case for hikes. A more benign inflation backdrop than in 2022 gives them room to stay on hold for longer.

Supply shock argues for policy patience

"Along with global markets, the CEE region saw some relief yesterday despite energy prices remaining elevated. Rates eased from Friday’s highs and FX saw some relief as well. February secondary inflation figures in Poland and the Czech Republic confirmed a favourable starting point before the US-Iran conflict. However, the question is how long higher energy prices will remain."

"For now, it seems that central banks in the CEE region view the shock as a supply-side problem and prefer to see it through. This only makes sense as long as the conflict is short-lived and we can only attribute a few tenths of a percentage point to headline inflation through higher fuel prices. For now, we see that we should stick with this scenario and possibly a limited second-round impact on inflation, assuming that FX remains relatively stable as we have seen so far."

"In such a scenario, central banks in the CEE region will be on hold, and outpricing rate cuts make sense. But for now, we do not see a case for rate hikes, which the market quickly priced in."

"The starting point for this conflict is very different from 2022, when the Ukraine‑Russia war began. Back then, the economy wasn’t fully reopened after Covid, households held excess savings from government support, pent‑up demand was strong, and inflation was already climbing. In the current environment, inflation is below target, FX is more stable, the current account has improved, and the domestic economy is far more predictable than during Covid. This gives central banks room to wait longer – which is our baseline for now."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)