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Romania’s 25 basis point rate hike on Tuesday may signal an end to Central Europe’s aggressive 18-month campaign of monetary tightening but persistently tight local labour markets and other obstacles still litter the path towards lower inflation.

The relatively modest move consolidated a view among economists that the region, which was at the forefront of a global tide of policy tightening to arrest a once-in-a-generation surge in prices, is turning the page on rate rises.

The Romanian central bank said slower economic growth and cheaper energy would help bring inflation down to single digits this year from over 16% now, earlier than previously forecast.

Since June 2021, Poland and the Czech Republic have hiked rates by nearly 700 bps apiece while Hungary’s central bank has raised by more than 1,200 bps to set the highest benchmark for borrowing costs in the European Union.

The consensus forecast of economists polled by Reuters between mid-December and early January projects no more rate rises in Poland, Romania, the Czech Republic or Hungary.

“We consider the hiking cycle in the region to be over,” economists at ING said. “So the main question is when inflation in the region will fall enough that central banks will be willing to start normalising monetary conditions.”

Czech and Polish bank governors have not slammed the door completely on more rate increases and some investors have outside bets on more tightening in Romania, whose central bank, possibly mindful of Hungary’s ill-fated example last year, has not stated whether rate hikes have ended.

But those views are in the minority. Last month’s downside inflation surprise in Poland, the region’s biggest economy, even led Societe Generale analyst Marek Drimal to reverse his call for more rate rises in the first quarter and pencil in a 50 bps cut in October instead.

Economists see most room for possible cuts in Hungary and the Czech Republic, the latter having seen a nearly 10% fall in real wages based on the latest data. Its crown currency scaled a 12-year-high this week, eclipsing others in the region.

Inflation is still expected to rise in early 2023 in some central European countries, based on central bank forecasts, before returning to single-digit territory by year-end. Strong underlying pressures mean it is nevertheless still on track to significantly exceed their targets.

However, some economists note that recent falls in energy costs, a main driver of last year’s price surges in import-reliant central Europe, could paint a more benign picture of headline inflation going forward.

“The narrative surrounding Europe’s energy crisis has completely shifted in recent weeks as warmer-than-normal winter temperatures have reduced heating demand and pushed gas prices down sharply,” said Liam Peach at Capital Economics.

“This will help to improve external positions and lower inflation pressures in Central and Eastern Europe.”

Even so, the disinflation process will be fraught with risks, including a possible reversal around year-end of the fall in real wages, a shallow recession that leaves some of the EU’s tightest labour markets relatively unscathed, and inflation expectations becoming entrenched above central bank targets.

“We remain cautious of returning positive real wage growth towards the end of 2023 stopping core disinflation in its tracks,” HSBC economist Agata Urbanska-Giner said on Poland, pointing to upside inflation risks from strong wage growth.—Reuters

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