Opinion Joost Derks

All the moneyballs on Eastern Europe

June 26, 2024 - Joost Derks

At Euro 2024, Eastern European countries have yet to make a significant impact. This lackluster performance is mirrored by the currencies of Poland, the Czech Republic, and Hungary over the past months. However, the economic data to be released next week could potentially change this narrative.

Eastern European countries haven't captured football fans' hearts with dazzling play in recent weeks. Despite this, Poland and the Czech Republic still have a chance to advance to the next round, while Hungary likely secured their spot with a late goal against Scotland. On the currency markets, the Polish zloty, Czech koruna, and Hungarian forint are often mentioned together, primarily due to their geographical proximity. However, there is a considerable difference in the monetary policies and strengths of these currencies. For instance, the Czech central bank is aggressively cutting interest rates, with another reduction of a quarter or even half a percent expected this Thursday.

Watch out for Czech competitiveness
This upcoming cut would be the fifth in just over six months. The Czech central bank aims to stimulate the economy, which is projected to grow by 1.5% this year and 3% in 2025, a respectable performance compared to the rest of Europe. However, high interest rates have led to a sharp decline in business investments, now at their lowest level since 2018. In the long term, this could pressure the international competitiveness of the Czech industry. With inflation quickly approaching the 2% target, there's plenty of room to further lower the policy rate. However, a falling interest rate makes it less attractive to hold assets in a currency. Over the past year, the koruna has lost 5% of its value.

Wage surge in Hungary
In Hungary, interest rates have also dropped rapidly. The central bank in Budapest has lowered the main rate from 13% to 7% in nine steps since last autumn. Over the past year, the forint has depreciated by 6% against the euro. However, the outlook for the forint is more optimistic compared to the Czech koruna. Wages in Hungary are soaring, with the latest data indicating an average salary increase of 13.5%. Rising incomes often fuel inflation. The combination of higher wages and moderate economic growth gives the Hungarian central bank plenty of leeway to pause further rate cuts for now.

Polish Zloty in demand
The same is true for Poland, where the central bank in Warsaw will make a rate decision next Wednesday. The main rate has been steady at 5.75% since November. Yesterday, it was revealed that retail sales in May increased by 5%, suggesting a robust economy, while inflation at 2.5% aligns perfectly with the Bank of Poland's target. With the prospect of the policy rate falling less sharply than in the eurozone, the zloty is in high demand. The currency has risen by 4% over the past twelve months. Unlike at Euro 2024, Poland's outlook in the currency market is brighter than that of other Eastern European countries.

Joost Derks

Joost Derks is a currency specialist at iBanFirst with over twenty years of experience in the foreign exchange market. This column reflects his personal opinion and is not intended as professional (investment) advice.

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