(Bloomberg) --
Inflation shocks across eastern Europe have put local central-bank policy front and center for bond and currency traders, even as officials play down the uptick in price growth.
The Czech koruna is the biggest climber among its near neighbors this year and hit a seven-year high on Wednesday as the prospect of a ninth rate hike in little more than two years lured investors. At the other extreme, the Hungarian forint is the worst performer in the period as policy makers cling to a no-change stance. Bond yields have climbed across the region.
Higher-than-forecast inflation prints from Poland, the Czech Republic and Romania in the past week have rattled markets and served up a reminder that risks from a tight labor market haven't abated. It's a predicament that contrasts with the euro area, where the European Central Bank is struggling to rekindle price growth.
Given eastern Europe's trade links with the euro region, some policy makers are looking past spikes in inflation and maintaining loose monetary policy. Investors aren't fully on board, however.
Traders are “pricing in the risk that inflation may actually stay high for longer,” while central banks may still be treating this as temporary, said Tatha Ghose, a currency strategist at Commerzbank AG in London.
After Poland's inflation surprise this year, 10-year yields are up 18 basis points to 2.25%, almost double the increase for Hungarian and Czech bonds. At the same time, the forint has weakened 1.3% against the euro, burdened by one of the deepest negative real interest rates in the world. That compares with a 0.2% gain for the zloty and a 0.9% advance for the koruna.
Patterns Change
The focus on monetary policy marks a shift from previous trading patterns in the region. Markets had largely moved as a more uniform bloc, with assets rising and falling in line with the latest headlines on the trade war between the U.S. and China.
| December inflation | Central bank target | |
|---|---|---|
| Poland | 3.4% | 2.5% with 1.5%-3.5% tolerance band |
| Hungary | 4% | 3% with 2%-4% tolerance band |
| Czech Republic | 3.2% | 2% with 1%-3% tolerance band |
| Romania | 4.04% | 2.5% with 1.5%-3.5% tolerance band |
Past experience suggests central bank officials may be right. Last year, a 1.2 percentage-point surge in inflation prompted Hungarian 10-year bond yields to jump 75 basis points. With price growth later easing, and the central bank in Budapest showing little sign of backing down on its loose policy stance, bond yields later fell to a record low.
While most central banks forecast inflation slowing back toward targets, the divergence may continue at least for another month. Inflation is likely to accelerate further in January due to statistical base effects in oil prices.
“The cocktail of inflation upside surprise and an improvement in European growth sentiment could force central European rates into steeper territory,” Citigroup Inc. strategists in London, led by Luis Costa, said in an emailed note. “The opportunity for local rates to rally considerably seems to be closing now.”
To contact the reporters on this story: Adrian Krajewski in Warsaw at akrajewski4@bloomberg.net;Marton Eder in Budapest at meder4@bloomberg.net
To contact the editors responsible for this story: Alex Nicholson at anicholson6@bloomberg.net, Wojciech Moskwa
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