War pressure on Eastern European banks to prop up sinking currencies

Russia’s invasion of Ukraine is putting pressure on central banks on the European Union’s eastern flank to support their weakened currencies, forcing Czech and Polish authorities to intervene in the market and Hungary to prolonged rate hikes.
The market sell-off following the February 24 Russian invasion and an impending energy price shock in Europe due to a spike in global oil and gas prices are adding to already strong underlying pressures. on prices in the region, and the sharp weakening of currencies could fuel further inflation.
Economists say that against this backdrop, the region’s central banks – which have been battling inflation with rate hikes since June 2021 – have no choice but to step in as needed and tighten policy further. even as growth prospects are expected to deteriorate due to the military conflict.
“The monetary policy implications of the conflict for ECO-4 are decidedly hawkish, in our view,” Goldman Sachs economists said.
“While the crisis is likely to have a dampening effect on growth, the combination of rising commodity prices and depreciating currencies is significantly inflationary.”
“Furthermore, this pro-inflationary shock comes at a time when central banks in the CEE-4 are trying to tighten financial conditions to rein in exceptionally high rates of inflation. The recent depreciation of ECO-4 exchange rates makes this task more difficult.
Goldman Sachs raised its peak official rate forecast by 50 basis points to 5.5% in Poland, Hungary, the Czech Republic and Romania.
On Friday, the Czech National Bank (CNB) intervened in the market against excessive volatility and the depreciation of the krone, its first such move since the abandonment of the ceiling of the Czech currency in 2017, raising the unit from its lowest level in 10 months.
The CNB, which said it “is active in the foreign exchange market and conducts operations to mitigate excessive fluctuations and depreciation of the krone”, followed the Polish central bank in its intervention on Friday.
The Czech central bank has already hiked rates by 425 basis points since last June to take its rate to a 20-year high of 4.5% and analysts see chances of the bank raising rates by as much as 50 basis points. basis at its next meeting at the end of March. .
The National Bank of Poland also stepped in to support its currency by selling foreign currency for zlotys, while the National Bank of Hungary carried out its biggest rate hike since late 2008 to rein in the forint after successive historic lows.
Despite these movements, the three currencies, which started the year on solid footing, remained in the red for the year, with the zloty trading at its lowest level in 13 years. The forint hit record lows this week, falling to 385.97 against the euro on Friday afternoon from 372 on Monday.
Central banks can do nothing but remain hawkish in the short term, Wood and Co. economists said in a note, forecasting a 2 percentage point drop in economic growth in 2022 from their benchmark. previous year due to the inflationary shock.
“There is a high risk of double-digit inflation this year, moderating but remaining two to three times central bank targets in 2023E,” they said.
Economists say the rise in Romanian swap yields also signals central bank intervention to keep the leu stable.
The central bank denied comment, but it has a long history of foreign exchange interventions to stem high currency volatility.
The National Bank of Poland meets on Tuesday when it is expected to raise its key rate by 50 basis points to 3.25%.
The National Bank of Hungary is holding a no-rate-setting meeting tomorrow, which some economists expect to turn into a rate-setting meeting after the bank exhausted its room to maneuver with Thursday’s massive hike.
The bank raised its one-week deposit rate to 5.35%, just 5 basis points from the top of its interest rate corridor.
UniCredit economists have said the NBH may also have to intervene this year if government price caps to contain inflation, which hit a nearly 15-year high in January, are removed after the general election in April.
“We believe that rate hikes alone cannot strengthen the currency. If EUR/HUF stays near 380 for longer, the FX pass-through could exceed 1pp,” UniCredit said. —Reuters