Inflation in Central Europe rebounded in December to multi-year highs, in a turnaround likely to continue this year on rising oil prices, a jump in wages and loose fiscal policies.
Central banks in the eastern wing of the EU have been easing monetary policy since 2012 amid anemic inflation. But they are unlikely to raise interest rates due to the changing inflation picture just yet, as price growth does not exceed their targets.
Among them, the National Bank of Hungary could be the most dovish, potentially making Hungarian bonds the most exposed to “reflation trade” in the region, some analysts said.
Hungarian annual inflation accelerated to 1.8 percent in December — its highest level since July 2013 and above analysts’ consensus forecast for 1.6 percent, data showed on Friday.
In the Czech Republic, annual inflation hit its highest rate in four years in December at 2 percent, while Poland saw prices climb 0.8 percent in the year through December, up from no change in November based on preliminary data.
Romanian annual inflation was still negative in December, however.
“In the short term inflation is fueled by oil prices and a jump in food prices, but we can also see that there are more and more factors that will also raise core inflation,” said Eszter Gargyan, an economist at Citibank.
She cited loose fiscal policies, rising wages across the region, a shortage of labor and higher energy prices feeding through into services prices.
“The market has started to price this in, as we could see Hungarian (bond) yields rising significantly in recent days,” she added.
The yield on three-year Hungarian government bonds has risen about 15 basis points and the 10-year yield has climbed about 20 basis points since the start of the year.
Hungary’s central bank has pushed down short-term yields with its policies, so the yield curve could steepen as inflation picks up.
Years of emigration to Western Europe have created labor shortages across Central Europe, leading governments to hike wages sharply as unemployment rates dropped.
Analysts say this all poses an upward risk to inflation, which is hard to estimate. “The market is getting somewhat distracted by oil price moves and base effect CPI inflation narratives when the real and more substantive risk to CEE inflation is labor markets,” Nomura said in a note.

Source: Arab News