In Central and Eastern European markets, inflation is expected to rise or remain above central bank target ranges until the end of 2024. The decline in the rate of consumer inflation in the EEC over the past year has been above expectations, mainly due to the sharp drop in food and energy prices, says an Allianz Trade analysis. However, recent April data show a pick-up in inflation in Poland (2.4% y/y, March 2.0%), Czech Republic (2.9% y/y, March 2.0%) and Hungary (3.7% y/y, March 3.6%). The reversal was mainly driven by a stronger growth in food prices, especially in Poland which reintroduced the increased VAT rate.
In Poland and the Czech Republic, rising fuel prices also played an important role, reflecting the recent increase in global oil prices. Analysts expect food and energy inflation to rise for the rest of the year as the above-mentioned base effects fade. In the meantime, in Romania although it fell to 5.9% annually in April, inflation remained the highest in the region.
By the end of 2024, consumer inflation in Poland (4.6% annually in December), the Czech Republic (3.7%), Hungary (4.8%) and Romania (4.7%) [1] is expected to exceed the central bank target ranges again. For 2025 forecasts show a gradual decrease, except for Romania, where this could last until early 2026.
Inflation outlook Europe
Source: LSEG Datastream, national statistics, Allianz Research
Monetary policy in Central and Eastern Europe will be prudent until the end of 2025
Allianz Trade’s analysts expects that monetary policy in Central and Eastern Europe (CEE) will be moderate until the end of 2025, given the outlook for inflation and central banks likely to keep real monetary policy interest rates in positive territory. Besides inflation increase there are other reasons for a prudent monetary policy in CEE region in the following quarters. These include expectations of a moderate monetary easing cycle by the Fed and ECB, the uncertainty of oil prices amid the current crisis in the Middle East, as well as wage growth and loose fiscal policy in Poland, Hungary and Romania.
In addition, economic activity indicators for the first quarter point to an improving growth outlook, driven by domestic demand (especially in the services sector), which means that a reduced monetary stimulus may be needed for 2024. In this context, the Central Bank of Poland, which started the monetary easing cycle in the CEE with two rate cuts in September and October 2023, is expected to keep the monetary policy rate unchanged at 5.75% at least until the third quarter of 2024. Baseline scenario estimates are that the National Bank of Romania will most likely cut the policy rate by a total of 75bps in the second half of 2024, reaching 6.25% by the end of the year.
“However, the fiscal deficit rhythm (already at over 3%, against the initial target of 5% of GDP at the end of the year) could undermine our estimates above. Already faced with hard-to-reduce inflation in an election year when reducing recurrent government spending does not seem to be a priority, the National Bank may have to postpone its long-awaited monetary policy easing decisions. Inflation at the end of April of 5.9% is falling at a slower pace than previously forecast. A better agricultural year could help to keep inflation under control but most likely will not be able to offset double-digit increases in budget spending, which is why expectations also remain moderate.”, says CFA – Risk Director at Allianz Trade.
Czech Republic has also reduced the monetary policy with a total of 175bps in the last six months, but will slow the monetary easing cycle by a cumulative 100bps to 4.25% at the end of 2024. Hungary has so far recorded seven rate cuts amounting to 525bps since October 2023, but the easing cycle has already slowed down in April. Moderate rate cuts are forecast across the region in 2025, in line with falling inflation, but policy rates are likely to be higher later next year.
In Türkiye, inflation is expected to gradually decline after peaking this month, allowing the central bank to begin prudent monetary easing in the fourth quarter. After the May 2023 elections, Türkiye faced a strong and steady rebound in inflation from 38.2% annually in June 2023 to 69.8% in April 2024, mainly due to tax increases, the appreciation of the Turkish lira (TRY) after the Central Bank of Türkiye (CBRT) stopped excessive intervention in the foreign exchange market, and a large increase in the minimum wage in early 2024. This month inflation is expected to rise again to around 74% annually. Austerity measures announced by Türkiye’s Ministry of Finance – mainly the suspension of construction projects and non-essential public sector purchases – will help reduce inflation in the coming years. At the same time, the Central Bank of Türkiye must remain committed to maintaining a tight monetary policy and a monetary policy rate at 50.0% until inflation falls below this level towards the end of 2024. Also, if it starts a gradual monetary easing cycle in the fourth quarter, monetary policy rates of around 45% at the end of 2024 and 25% in 2025, will keep the real interest rate in a positive scenario.
In the US market, the threat of higher tariffs on goods from China is greater than the actual impact. In the auto market, the new tariffs target $18bn worth of Chinese imports, especially batteries, with China being the main supplier to the US. Allianz Trade analysts forecast that the weighted average tariff rate on the targeted goods will rise from 7.8% to 14.5% this year, rising to 28.3% by 2026. Increasing electric vehicle tariffs to 100% is largely a symbolic move. Tariffs of 25%, coupled with restrictions that prevent electric vehicles with Chinese components from benefiting from subsidies, have already reduced imports from China. However, this measure will bring several issues to the fore, including increased investment by Chinese companies in Mexico, trade diversion and false invoicing. In addition, more and more Chinese automakers are producing cars in Mexico to circumvent prohibitive tariffs to the US. But increased imports of vehicles made in Mexico could lead to trade tensions. Moreover, the diversion of Chinese exports to the US via third countries to avoid tariffs, as well as under-reporting or false invoicing of imports by US importers, could increase, prompting US authorities to crack down at some point.
But the stake is higher for Europe. It will not be easy to follow the example of the United States of America without damaging its own car industry. China is currently the largest exporter of new cars to the EU in terms of both value and volume, and sales of Chinese electric vehicles have increased significantly. However, the EU is expected to step up its trade measures against China. The recent series of anti-subsidy investigations, starting with the electric vehicle industry and extending to trains, wind turbines and medical devices, point to a shift towards a tougher position in the coming period.
A moderate increase in import tariffs would not change the competitive dynamics much. Compared to the US, the EU will not act as aggressively because European carmakers are dependent on China. Thus, a shock to the Chinese auto sector would have much greater repercussions for the German auto sector than for the US auto sector, which is about 10 times larger relative to the size of the sectors. In addition, German car manufacturers already import a significant share of Chinese cars and equipment into Europe and in this context, higher EU tariffs could eventually backfire on Europe’s own carmakers. And agriculture, one of the few sectors in the EU that enjoys a large trade surplus with China, could also be vulnerable to escalating trade disputes. Any decision by the European Commission to increase tariffs on Chinese electric vehicles must therefore be accompanied by a strategy to strengthen European supply chains and access to minerals to create a boost for local investment.
[1] Inflation ranges set by the central bank are 2.0% ± 1pp in the Czech Republic, 2.5% ± 1pp in Poland and Romania and 3.0% ± 1pp in Hungary
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