Inflation in Eastern Europe will slow monetary easing

Significance

The unexpected decision adds significant momentum to Central Europe’s monetary easing campaign, which began in May when Hungary’s National Bank (MNB) reduced its benchmark rate for the first time in three years. Price pressures have abated significantly, but policy credibility is being questioned, particularly given large fiscal deficits in Hungary and Poland.

Impacts

• Hungary’s record budget deficit will put further strains on the public finances as EU funding is withheld over rule-of-law concerns.
• Poland’s upcoming elections have not had a discernible impact on market sentiment despite policy and geopolitical uncertainties.
• Higher oil prices will affect the United States less than the euro-area -- a net energy importer facing rising risks of stagflation.