Bets on central European rate cuts soon are ‘optimistic’ -EBRD

By Gergely Szakacs

BUDAPEST (Reuters) – Market bets on interest rate cuts in central Europe in the near future are optimistic as inflation could end up being stickier than expected, the European Bank for Reconstruction and Development’s chief economist, Beata Javorcik, told Reuters.

Rate-setters in central Europe, who were at the forefront of a global tide of monetary tightening in 2021, are seeking to keep rate policy stable for now as the region slows sharply due to the fallout from the war in neighbouring Ukraine.

The Hungarian and Czech central banks, which were the first to start raising interest rates two years ago, could become the first in Europe to start lowering borrowing costs this year amid an expected retreat in inflation.

Economists see the first cut in Czech rates in the second half, while analysts in the latest Reuters poll were split over whether Hungary’s central bank could start lowering interest rates in the second, or the third quarter.

With Hungary mired in a technical recession, its central bank has come under growing pressure from Prime Minister Viktor Orban’s government to start lowering borrowing costs.

“Relative to these previous experiences (two recent episodes of disinflation), the IMF is projecting very fast disinflation. In that sense, we think that these projections are optimistic,” Javorcik said on Tuesday.

“This suggests that the view that central banks will start cutting interest rates very soon is quite optimistic as well.”

In January the IMF projected inflation in emerging market and developing economies to ease to 8.1% in 2023 and 5.5% in 2024, still above a 4.9% pre-pandemic average.

Javorcik also said despite a market sell-off at the start of the week following last week’s collapse of Silicon Valley Bank, a repeat of the 2008 Global Financial Crisis that followed the collapse of U.S. investment bank Lehman Brothers was unlikely.

“The Lehman moment was associated with financial innovation that was poorly understood at the time. The scale of the phenomenon was poorly understood as well,” she said.

“In the case of SVB, we are dealing with an old-fashioned type of a crisis prompted by an environment of higher interest rates,” Javorcik said, adding that U.S. regulators stepped in very quickly to stem the fallout, limiting contagion risks.

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