BNY's EMEA Macro Strategist Geoff Yu argues that the National Bank of Poland’s (NBP) March rate cut underestimated inflation risks linked to the regional conflict. While European Central Bank (ECB) and Bank of England (BoE) pricing looks excessive given weak Eurozone and UK growth, he sees Central and Eastern Europe (CEE) rate expectations as too defensive. He flags upside risks to CEE policy pricing, starting with the NBP, over the coming months.

CEE central banks lag ECB repricing

"The NBP decision in March was the first major European central bank decision at the beginning of the Iran conflict. Understandably, the consensus at the time saw a time-limited operation that was not expected to generate prolonged disruption to global energy markets or other inputs. The NBP press release didn’t even mention a conflict, only acknowledging that “changes in the global commodity prices and inflation, amid geopolitical tensions,” represented a risk factor for the country’s inflation outlook."

"Ultimately, it wasn’t long before global policy expectations were upended. Instead of further softening in CPI, Polish inflation jumped to 3% y/y in March, led by a 1.0% m/m sequential figure as input prices increased materially. Other central banks in the region have shifted their near-term outlook without pre-committing to any moves, and we believe the general inflation figures in CEE don’t warrant a strong reaction yet."

"We remain of the view that current ECB and BoE pricing is excessive. Given the condition of the Eurozone and U.K. economies, there is very limited scope for aggressive tightening without triggering a material economic downturn, independent of a view on the direction of the conflict."

"Either way, we see strong upside risks to CEE policy pricing in the near term, beginning with the NBP, unless the market significantly changes its expectations for the ECB as well. The latter course is more in line with fundamentals, in our view, but rates markets currently believe otherwise."

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