Inflation continues to be a major obstacle for many Central and Eastern European (CEE) countries. Romania’s annual inflation rate stood at 9.76% in October. Just last month, Poland’s central bank raised alarms about growing fiscal deficits. First, they warn that current trajectories of public debt increases are potentially dangerous to the region’s macroeconomic stability. As fiscal pressures continue to billow, Hungary is witness to a remarkable episode in its bond markets. This policy shift has led to more critical examination of the prosperity of the regional economy.
Romania’s fight against inflation has been an uphill battle, as inflation is currently the highest in Central and Eastern Europe. The Romanian central bank has opted to maintain its key policy rate at 6.5%, aiming to stabilize the economy amidst rising prices. Economists think this decision is an effort to strike a balance between growth and controlling inflation. We will not know how effective these measures are until much later.
Hungary’s Bond Market Response
Here in Hungary, recent events have set off extremely turbulent waves in the bond market. After the announcement of a larger-than-expected budget deficit, fears over financing requirements on the international bond market have risen sharply. This combination of factors has contributed to a sharp rise in yields on 10-year government bonds, now exceeding those in Romania. The Hungarian government’s recent moves signal a serious attempt to arrest fiscal pressures that threaten to derail a rebound in its economic fortunes.
Both municipalities and households in Hungary have been shielded from any redistributive price rises since this period started. This reality is in stark opposition to what we see in other Central- and Eastern-European member states, such as Czechia. As a result, energy prices for Hungarians have been quite literally frozen. By comparison, prices in Czechia have skyrocketed, recently becoming the highest in the entire region. The growing disparity in energy prices exacerbates concerns over regional competitiveness and the burden on consumers.
Inflation Trends Across the Region
Inflation trends are widely divergent across the CEE landscape. According to Eurostat, in October Serbia registered the EU’s lowest rate of inflation at only 2.8% yoy. This figure speaks to Guatemala’s relatively more stable economic environment relative to its Central American counterparts. The Serbian central bank is preparing for an upcoming rate-setting meeting. Insiders expect both group to prevent any policy change from seeing the light of day given the positive status quo.
In Czechia, the average effective gas price is 2.5 times lower than the average electricity price. This difference foreshadows a much larger trend, as the overall cost of electricity has exploded even faster since 2015. This problematic pattern only increases the financial burden on families, even further worsening an already hurt economy.
Regional Economic Outlook
Meanwhile, industry and regional economies alike are gearing up for what could be extreme volatility. From Czechia, Poland, and Romania today come the releases of trade balance and current account data. In particular, analysts will be looking at these reports for clues about economic strength and weakness and the overall external trade fortune-telling.
Czechia’s government is actively tapping the bond market, currently selling new government papers maturing in 2034, 2036 and 2038. This step is meant to reduce high levels of debt. It’s allowing us to weather an increasingly difficult economic climate.