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With rate cuts over, CEE central banks eye Brexit, fiscal stimuli
June 2, 2016 / 12:10 PM / a year ago

With rate cuts over, CEE central banks eye Brexit, fiscal stimuli

BUDAPEST (Reuters) - Central and eastern Europe’s central banks have mostly finished their rate cuts though will be in no rush to start tightening as regional inflation is down and economic growth has slowed.

The region’s central banks have adopted a wait-and-see mode as they expect volatility in markets to rise around a June 23 referendum in Britain on European Union membership - especially if the vote results in Britain leaving the bloc, which could have a long-term impact on the future of the European project.

This worries central and eastern European states, which have benefited from hundreds of billions of euros of EU investment funds and have more than a million of their citizens working in Britain.

“A long-term impact cannot be seriously estimated, because everything would depend on the negotiations between the UK and EU on setting their mutual partnership after possible Brexit,” the incoming governor of the Czech central bank, Jiri Rusnok, told the Reuters Eastern Europe Investment Summit this week.

“Certainly, you can expect volatility and rather weakening of both British and European assets,” he added.

Hungary’s central bank has pledged to keep its base rate at 0.9 percent as long as possible, saying this ensured meeting its inflation target. A Hungarian central banker told the Summit that a new rate cut cycle “can be excluded” based on current information.

“If the vote resulted in the Brits leaving the EU, that would certainly increase volatility in markets in the short term, especially in the case of emerging markets,” central bank executive director Barnabas Virag said.

A Polish rate setter told the Summit that rates should stay unchanged this year at a record low of 1.5 percent as “the current rate level is beneficial for the Polish economy”.

And Romania’s central bank is also expected to hold fire. Most analysts in a Reuters poll see rates still at the same record low level of 1.75 percent in March 2017.

The exception is Serbia, where rates are the region’s highest at 4.25 percent, and where the central bank said it expected its policy to remain “expansionary”.

FISCAL STIMULUS

As monetary easing has run its course, some Central European countries are embarking on fiscal stimulus and tax cuts to boost their economies, which slowed in the first quarter.

“We are preparing with fiscal incentives, as we think that with the funding for lending program running out and interest rates at a very low level, this will usher in an era when fiscal incentives become much more active in boosting the economy,” Hungarian Economy Minister Mihaly Varga told the summit.

Hungary’s economic growth slowed to an annual 0.9 percent in the first quarter. But tax cuts, government incentives to boost new housing construction and rising consumption are expected to prop up growth later this year.

In Romania, where the government faces elections in December, there will be a cut in the value added tax rate from January 2017, and there is pressure to hike wages. This should stimulate the economy, which beat market expectations in the first quarter by growing 4.3 percent on the year.

In Poland, which also launched fiscal loosening, central bankers said after their May rate meeting that stable rates would support growth. Some central bankers did not rule out a rate cut if growth slows significantly and deflation deepens.

Tightening, however, is unlikely to be on the cards this year even if the Federal Reserve delivers on its rate hikes.

“If it comes (a rise in Fed rates) it will be, I think, rather good news from our point of view,” Czech central bank chief Rusnok said. “It makes our monetary conditions easier in relation to the dollar and of course it will have some indirect impact on the euro and ECB considerations.”

Follow Reuters Summits on Twitter @Reuters_Summits

Aadditional reporting by Jason Hovet in Prague, Radu Marinas in Bucharest, Ivana Sekularac in Belgrade and Warsaw bureau; Writing by Krisztina Than; Editing by Mark Heinrich

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