Eastern Europe Sidesteps Global Shift Toward Monetary Easing

(Bloomberg) — Eastern Europe is sidestepping a wave of monetary easing that’s spreading across major economies in anticipation of potential turmoil as Donald Trump returns to the White House.  

A combination of sticky inflation, weakening currencies and widening budget deficits are making central bankers in the region wary of interest-rate cuts, leaving the outlook for an already fragile recovery even more uncertain. 

Hungary’s central bank on Tuesday left its key interest rate unchanged at 6.5% for a third month. The Czech Republic will likely follow suit on Thursday. Romania is grappling with election-season chaos after delivering two cuts earlier this year. In Poland, the central bank governor is being accused of playing politics by delaying cuts into 2026. 

To their credit, policymakers in the European Union’s east acted early to cushion the weakness of the region’s main export partner, Germany. Officials in Budapest and Prague steadily lowered rates earlier this year, but the way forward is more complicated.  

The divergence is emerging as European Central Bank officials signaled last week that borrowing costs will continue to decline after delivering its fourth rate cut of the year. The Swiss National Bank surprised with a half-point reduction, followed by Danish policymakers with a quarter-point easing.

Brushing aside concerns about lingering price pressures, Western central bankers are looking to prepare their economies in case of any trade or geopolitical disruptions that Trump’s second term might bring. The US Federal Reserve is also widely expected to cut rates again this week.

It’s a different picture in the EU’s eastern flank, where currencies are particularly exposed to any market volatility and inflation remains high. 

Hungary’s central bank kept its key interest rate unchanged despite the economy slipping back into recession in the third quarter. The weak forint is the main obstacle for more cuts, though accelerating inflation is also clouding the picture.

“Under normal circumstances, the inflation picture and risk perceptions would leave some room for easing,” ING Bank NV’s economists led by Peter Virovacz said before the decision. “But the instability in the financial markets has once again sealed the deal.” 

The forint fell to a two-year low against the euro at the end of last month, before recovering some of the losses in the past two weeks. Money market prices now indicate bets on fewer than two cuts in the next six months. 

That decision will fall on the next governor, who will take over from March. Finance Minister Mihaly Varga, whom Prime Minister Viktor Orban has nominated for the job, vowed to maintain the institution’s independence at his parliamentary hearing on Monday. Orban’s government has been calling for lower borrowing costs. 

Anemic Growth

In the Czech Republic, policymakers are preparing to halt their easing campaign when they meet on Thursday, after slashing the benchmark rate by three percentage points over the past year. Hawkish signals out of Prague have prompted investors to scale back bets on Czech rate cuts. 

While the economy is struggling with anemic growth, officials including Governor Ales Michl have repeatedly pointed to the persistent rise in the cost of services as a key risk for inflation outlook. Wages are also growing rapidly.

Still, Martin Gurtler, an analyst at Komercni Banka AS in Prague, said he expects cuts to come back into focus “given the ongoing subdued economic performance and our expectation of lower inflation.” He sees the main rate falling to 3% in June from 4% currently after reductions at every meeting next year. 

No such luck in Poland and Romania, where economies are going through a downturn in consumer spending that has sapped growth.

Poland’s central bank chief Adam Glapinski earlier this month unexpectedly delayed prospects for rate cuts into 2026, citing uncertainty over inflation. His decision prompted accusations from the government that his actions were politically motivated, given his links to the previous ruling nationalist party.

Meanwhile, Romania is engulfed in a political crisis that’s likely to complicate efforts to rein in the EU’s largest budget deficit, which is a key condition for the central bank to restart rate cuts.

–With assistance from Andras Gergely.

(Updates with Hungarian rate decision in the third and eighth paragraphs.)

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