Central bankers in eastern Europe see their policies unaffected by the U.S. Federal Reserve’s withdrawal of stimulus as their economies benefit from the neighboring euro area emerging from a record-long recession.
For the Czech central bank, the direct impact of tapering is a “non-issue,” Lubomir Lizal, a member of the policy board, told a conference yesterday in Vienna. For Hungary’s monetary authority, the removal of stimulus doesn’t mean a “higher interest-rate arena,” Magyar Nemzeti Bank Vice President Adam Balog said at the same event.
“The impact of Fed tapering is fully priced in by now, so their optimism is warranted,” said Benoit Anne, head of emerging-market strategy at Societe Generale SA. (GLE) “Central Europe was shielded from the stress because of its link to the euro area. The dollar bloc got hurt more.”
The Czech and Hungarian policy makers joined Poland’s central bank chief in dismissing the impact of the Fed reducing the scale of its bond buying. Narodowy Bank Polski Governor Marek Belka last week said he didn’t see “any risk on the horizon” that would change the monetary authority’s policy.
Their confidence was buoyed by the European Central Bank sticking to its pledge to keep monetary policy accommodating for “as long as necessary,” even as the the Fed’s started to pull back stimulus last month. The prospects for withdrawal of stimulus roiled emerging-market bonds in 2013 and forced policy makers in developing nations such as Brazil (BZSTSETA) to raise interest rates to stem capital outflows.
The Polish zloty, the Hungarian forint, the Bulgarian lev and the Romanian leu were among the five best performers against the dollar in the fourth quarter of 2013 among 24 emerging-market currencies tracked by Bloomberg, along with the South Korean won. The bottom five were the Argentinian peso, the Indonesian rupiah, the Brazilian real, the Turkish lira and the South African rand.
Eastern Europe can fall back on an improving economic outlook as the euro area, the main market for its exports, recovers from a debt crisis.
The economy of Hungary, the region’s most-indebted nation, grew at the fastest pace in 2 1/2 years in the third quarter. Croatia’s economy, which has gone without growth for five years, will expand 0.8 percent in 2014 after shrinking by the same amount last year, the World Bank said Dec. 18.
The recovery marks a turnaround after Lehman Brothers Holdings Inc.’s 2008 collapse triggered recessions that forced countries from Hungary (HUGPTOTL) to Romania to seek international aid. Governments have since steadied their finances by narrowing budget deficits and reducing dependence on foreign capital.
Romania’s current-account gap should be 2 percent of gross domestic product in the next two years, central bank Deputy Governor Cristian Popa, said yesterday at the conference. That compares with 11.6 percent in 2008, data compiled by Bloomberg show. Hungary recorded a record current-account surplus in the third quarter.
“Most countries have gotten their budget deficits well under control and have very low current-account deficits,” Gunter Deuber, head of central and eastern European research at Raiffeisen Bank International AG (RBI), said yesterday by phone. “This is also why the region did better in the first sell-off.”
Sturdier finances have allowed central banks in the region to slash interest rates to record lows. With inflation subdued, they probably won’t begin raising borrowing costs before “late summer,” Juraj Kotian, an analyst at Erste Group Bank AG in Vienna, said Jan. 2 in a note.
In the Czech Republic, where the economy shrank for a seventh straight quarter on an annual basis between July and September, higher borrowing costs remain a remote prospect.
“Our financial sector is flooded with liquidity,” Lizal said. “I might even call it liquidity trap. From this perspective, we have the opposite problem -- we’re a provider of liquidity.”
Czech policy makers are trying to reflate the economy by weakening the koruna against the euro after they exhausted room for rate cuts with borrowing costs of effectively zero percent.
While some central bankers aren’t rattled by the removal of U.S. stimulus, it’s giving some policy makers pause for thought. The Fed’s actions are making Romania “prudent” in its interest-rate reductions, according to Popa.
“We have to deal with the fact that the Fed taper is a reality right now and not just a theory,” he said. “Changes in investor risk appetite” are one of the “major factors” that can influence future inflation. The room for further reductions from the record-low is 3.75 percent is “very limited.”
Lithuania is more optimistic. The reduced reliance of its banks on foreign funding makes the country better prepared to withstand fallout as the Fed trims stimulus, according to central bank Governor Vitas Vasiliauskas.
The only Baltic nation yet to adopt the euro is making a second attempt to join the 18-member currency region. While a 2007 bid failed because inflation exceeded the threshold, the country is now seeking to reduce the budget gap to within the ceiling required to complete the switch in 2015.
“If we compare the funding situation in Lithuanian banks before the crisis and at the moment, the situation is really changing because before the crisis, most capital was coming from parent banks in Scandinavia,” he said. “Now, subsidiaries are more orientated to the local market, to local deposits.”
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