Fed and ECB will ease Central European policy dilemmas

Subject

Impact of global policy shifts on monetary policy in Central Europe.

Significance

The dramatic decline in euro-area government bond yields has helped push down yields across Central Europe, with bond markets now pricing in interest rate cuts in the Czech Republic, only a month after the Czech National Bank (CNB) increased borrowing costs to 2%. However, the scope for monetary stimulus in Central Europe is limited, thanks to inflationary pressures.

Impacts

• MSCI’s index for Polish, Hungarian and Czech equities is rising, despite a slight loss for the broader emerging market index.
• Government bonds are rallying sharply in both developed and developing economies as ten-year US Treasury bonds fall.
• The Brent crude international oil benchmark has reached 65 dollars/barrel thanks to escalating US-Iranian tensions and dollar weakness.