Thursday, October 28, 2021

Analysis: Energy costs add to inflation headache of emerging central banks

LONDON: Higher energy prices are driving up inflation in many emerging markets, testing the resolve of their central banks and undermining growth in Hungary, Poland and the Czech Republic, and more currency weakness in Turkey. , analysts say.

In a bold response to price pressures, the Czech National Bank (CNB) on Thursday raised its key interest rate by 75 basis points, its biggest increase since 1997. It cited rising energy prices as well as supply-chain disruptions and domestic factors. Higher cost in owner-occupied housing and services.

The country’s prime minister said growth would hurt the economy, reflecting the dilemma facing emerging central banks as they continue to run above target levels, while maintaining a fragile economic recovery from the COVID-19 pandemic. Trying to remove inflation.

Benchmark European gas prices have risen more than 300 percent this year, with lower storage levels, outages, and higher demand as economies rebound, dragging down the cost of bulk electricity.

The Czech Republic, Poland, Hungary and Romania were exposed to higher growth than the rest of the European Union because energy and utilities accounted for a relatively larger share of their consumer price index baskets, while their electricity supplies would have been exposed to carbon-intensive Is. sources, Goldman Sachs analysts said.

Turkey has also been locked in, with prices of natural gas for industrial use and electricity generation rising by 15 percent last month.

Tatiana Lysenko, chief economist at S&P Global Ratings, highlighted Poland, Hungary, Russia and Brazil, saying consumer prices have generally increased more in countries where the economic rebound between the third quarter of 2020 and the second quarter of 2021. was fast.

“Inflationary pressures in emerging European economies are proving to be more persistent than we expected,” Lysenko said.

“EMEA central banks will continue to navigate a complex landscape, seeking a balance between supporting recovery and stabilizing inflation expectations in an environment where supply-side pressures may last longer than previously anticipated.”

Graphic: Emerging market growth revised up, inflation up:

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Yug Times Photos

With high global energy and food prices showing some signs of easing and the Czech Republic, Hungary, and others also facing tighter labor markets, inflationary pressures should ease.

Goldman Sachs has forecast inflation for the year at 4.5 percent in Romania, 3.9 percent in the Czech Republic and 3.7 percent in Poland.

The Czech central bank said Thursday’s big hike will be followed by more growth as it aims to deter individuals and firms from getting used to inflation exceeding its 2 per cent target.

Central bank deputy governor Barnabas Virag said on Friday that Hungary plans to further tighten policy in the coming months, with base interest rates increasing by 15 basis points.

Dispassionate comments and the Czech rise boosted the currencies of both countries, with the Czech crown reaching a one-month high against the euro.

Analysts say Poland may also enjoy delivering above-expected growth.

Citi analysts said they expect Poland to deliver its first rate hike in March or April 2022, but said a faster-than-expected hike is possible if the bank becomes more confident about the strength of economic growth. .

However, Turkey is likely to prove to be an exception. President Tayyip Erdogan’s desire for stimulus often trumps conservative approaches to monetary policy.

Despite inflation running above target at 19.25 per cent, the central bank last month reduced its policy rate by 100 basis points to 18 per cent.

People shop at a local market amid the outbreak of the coronavirus disease in Istanbul, Turkey on September 14, 2021. (Dilara Senkaya/Reuters)

“Turkey is most vulnerable to high energy costs because they have historically upset its balance of payments as import costs have risen,” said David Rees, senior emerging market economist at Schröders.

“The lira has come under pressure following the recent surprise rate cut and may continue to sell if energy prices rise further.”

The lira has recently fallen to record lows, rekindling memories of the 2018 currency crisis and denting Turk’s earnings.

by Tom Arnold




This News Originally From – The Epoch Times

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