Articles
28 January 2021

CEE: Delayed recovery but no fundamental change to the outlook

The recovery is delayed, but not derailed. Although coming later than expected, we still look for a meaningful rebound from the second quarter. Our outlook for central banks and asset markets is unchanged. The Czech central bank should hike twice this year, while Poland and Hungary should stick to QE. CZK remains our top pick while HUF is the least preferred

Czech_11724946p.jpg
Long queue of border commuters at Czech-Germany border-crossing in Folmava, Czech Republic - 25 Jan 2021
Source: Shutterstock

Covid-related restrictions delay the recovery...

As is the case in the eurozone, Covid restrictions will stay in place in the Central and Eastern European region for longer than initially expected. The pace of vaccination is similarly rather slow and as such, the expected rebound will come later than expected. But while the recovery has been delayed, the latest Covid restrictions will not derail the regional growth story and the outlook for local central banks and asset markets remains largely unchanged.

The Czech Republic provides a case in point. Although the country has suffered from one of the worst daily death rates in the world, this has not led to stricter lockdown measures in comparison to its European peers, thus not translating into a more pronounced fall in economic activity and in turn not warranting a material revision to the growth outlook relative to others.

The expected rebound in CEE economies from the second quarter onwards, as restrictions ease in the spring, should be driven by a mix of factors such as consumption, exports, and public investment (with the strength of each varying among CEE countries).

... but this should have a limited impact on the stance of local central banks

On the inflation front, we will see some divergence in coming months (see the chart below). While in the Czech Republic, inflation will move temporarily lower, in Hungary and Poland, CPI should move above target, with Hungarian CPI likely to reach 4% in May (albeit temporarily and due to base effects). But the National Bank of Poland and Hungary are unlikely to react and should keep policy accommodative (both central banks should continue with QE and rule out rate hikes). The Czech National Bank should be a first mover in the region and Europe as whole, commencing a tightening cycle in the second half of the year as CPI picks up again.

Hence, and despite the delayed post-Covid recovery, the outlook for the region remains unchanged, with the CNB regaining its position as the hawkish outlier in Europe, while the NBP and the NBH leave their respective policies accommodative. In Romania, the central bank delivered a surprise 25bp rate cut in early January. Albeit a close call, we don’t expect further rate cuts from here.

Diverging trends in CEE CPIs during the first half of the year

 - Source: ING
Source: ING

CZK still the top pick, HUF the least preferred

With the prolonged Covid restrictions having a largely non-differentiating impact on CEE economies and the outlook for local central banks remaining unchanged, our CEE FX view for 2021 has not changed either. We have a strong preference for the Czech koruna, a neutral view on Poland's zloty and the Romanian leu, and see Hungary's forint as the least attractive currency in the region.

CZK should benefit from the most hawkish central bank in Europe. The 50bp tightening we forecast for this year should help EUR/CZK to move to 25.50, with a strong downside risk to 25.00. While the NBP continues to threaten FX intervention, this will be hard to justify from mid-year onwards once the economic recovery gains traction. Add to this the highest current account surplus in the region and EUR/PLN should dip below 4.40 in the second half of the year. In contrast, Hungary's non-tightening policy stance, less sound current account position (vs Poland) and preference for gradual currency weakness all suggest that the forint should lag the koruna and zloty, with EUR/HUF likely moving higher in the second quarter as inflation starts to rise (albeit temporarily) towards 4%.


Disclaimer

"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.

This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.

The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.

Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.

ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).