Central Europe's slow rate rises will aim at growth

Significance

The MNB’s first rate rise in a decade responds to headline inflation rising to the highest rate in the EU. The US Federal Reserve (Fed) decision to bring forward raising interest rates to 2023 is putting emerging market (EM) assets under increasing strain and heaping pressure on Central Europe’s central banks to begin tightening.

Impacts

• Capital markets’ ‘hunt for yield’ will bolster EM bond and equity funds despite concerns about the Fed’s withdrawal of stimulus.
• The vast majority of investors are behaving as if the current surge in inflation will prove transitory.
• A sharp deterioration in sentiment may follow if price pressures last longer than expected.
• Brent crude’s rise to its highest level since October 2018, despite the recent rally in the US dollar, will fuel inflationary pressures.