Room for more rate cuts is limited in Central Europe

Subject

Policy implications of the downward pressure on inflation from the renewed oil price decline.

Significance

The National Bank of Poland (NBP) is under the most pressure to loosen monetary policy further, as the country's core inflation turned negative in January 2016, whereas in Hungary and the Czech Republic, core inflation remains in positive territory. Although the Hungarian Central Bank (MNB) has introduced a range of unconventional measures aimed at giving it greater control of short-term market rates without changing its benchmark rate, it has reached the limits of ultra-loose monetary policy, with fiscal loosening supplanting monetary easing as the main source of stimulus.

Impacts

• Brexit's financial fallout is likely to stay contained, with equity markets rallying and gauges of financial volatility at historical lows.
• Germany's economy is likely to remain resilient post-Brexit, its composite purchasing managers' index rising to a seven-month high.
• This bodes well for Central Europe's economies, despite a recent slowdown in growth.
• Investors are losing confidence in the credibility and effectiveness of global monetary policy.
• However, very loose financial conditions in the global economy, particularly in Europe and Japan, will keep market sentiment favourable.