In Czechia, the exciting question will be whether interest rate cuts are already possible this year. There is currently an interesting disconnect between market expectations and verbal central bank communication. The market expects interest rate cuts this year and there is a possibility here when looking at expected inflation data.  

More importantly, we do not expect a very drastic interest rate cycle. We see the CNB remaining committed to a stability-oriented central bank course. By not cutting key rates too low, it probably also wants to keep the currency more on the stronger side and, at the same time, send a warning signal to policymakers not to put fiscal consolidation on the back burner. That's why we still see the key rate at 4.5% at the end of 2024. After all, parliamentary elections are due in 2025... 

In Poland, it should be noted that this is not just about monetary policy in the narrower sense. We are currently observing a very expansionary fiscal policy, which is due to the election calendar. The budget deficit should be above 5% of GDP this year, after below 4% last year. And this spending policy is taking place in tandem with a very tight labour market, which makes it difficult for the NBP to adopt a clear monetary policy stance.  

Still, a recent shift in wording from the NBP governor implies the central bank is set to launch the easing cycle already after the summer (and before parliamentary elections). Like in Czechia, and due to factors mentioned above, we do not expect this to be a fast cutting cycle. Thus, with possibly two cuts in 2023 and gradual easing in 2024, we expect the key rate to be lowered from 6.75% currently to 4.5% by the end of 2024. 

In Romania, we currently see no scope for monetary policy easing for a long time, despite initial signs of consolidation in price pressures. At present, the inflation data do not yet clearly point to a drastic disinflation in the near future, while the economy continues to grow very dynamically. In this respect, we do not see key rate cuts before Q2 2024 at the earliest. Also, it is worth mentioning that the NBR stated many times that the decisions of the Fed, ECB and the other central banks in the regions are of key relevance for the conduct of domestic monetary policy.  

However, the large liquidity surplus that persists in the banking system is not actively sterilised by the central bank, which allows the money market interest rates to trade at levels much below the level of the monetary policy (i.e. ROBOR 1M is quoted now close to 6.13%, and ROBOR 3M at 6.54%). The management of money market liquidity conditions is providing flexibility to the NBR to adjust rapidly the monetary policy stance if needed (also to support the RON) – without touching the key rate. 

We expect the most exciting monetary policy tightrope act to be in the case of Hungary. Here, we currently still have very pronounced inflation dynamics. To put this into perspective, 70% of the goods in the inflation basket here are rising by more than 10%! Core inflation, which is relevant for monetary policy, could still be 10% by the end of the year.  

The central bank (MNB) should get a tailwind in terms of monetary easing from politicians this time. In Hungary, we expect the strongest fiscal consolidation in 2023 and 2024 in regional terms. The government budget deficit should fall from over 6% in 2022 to 3% in 2024.  

In this respect, there is some scope for monetary easing. We see the key interest rate in Hungary at 12% by the end of 2023 and at 6% by the end of 2024. This substantial rate-cutting cycle may bring significant opportunities for financial market investors in the local bond market. In a way, we see the MNB betting on this as well. Because then the local currency should be able to remain stable because of the solid and stable capital inflows. 

However, in the case of Hungary, imponderables are always to be expected on the investor side. And in this respect,  the regional key interest rate cycle is most of all a balancing act between easing and market or capital flow risks.

Gunter Deuber is head of research at Raiffeisen Bank International in Vienna. Dorota Strauch is head of research for Poland.