East Europe Central Bankers See Policy Unmoved by Fed TaperPiotr Skolimowski, Alexander Weber and Agnes Lovasz
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. “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 said last week that he didn’t see “any risk on the horizon” that would change monetary policy.
Their confidence was buoyed as the European Central Bank stuck to its vow to keep monetary policy accommodating for “as long as necessary” even as the Fed started to pull back stimulus last month. The prospect of stimulus withdrawal in 2013 roiled emerging-market bonds, forcing policy makers in nations such as Brazil to raise interest rates to stem capital outflows.
Poland’s zloty, Hungary’s forint, Bulgaria’s lev and Romania’s 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 South Korea’s won. The bottom five were Argentina’s peso, Indonesia’s rupiah, Brazil’s real, Turkey’s lira and South Africa’s rand.
Eastern European government bonds have outperformed other emerging markets since May 22, when the Fed first signaled it may curb stimulus. While emerging debt has since lost 5.3 percent on average, Polish bonds have slipped 3 percent and Hungarian bonds have lost 0.1 percent, Bloomberg Indexes show.
Even as the Fed pulling back stimulus threatens to sap appetite for emerging-market assets, 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 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 surplus in the third quarter.
“Most countries have got their budget deficits well under control and have very low current-account deficits,” Gunter Deuber, Raiffeisen Bank International AG’s head of central and eastern European research, said yesterday by phone. “This is also why the region did better in the first selloff.”
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.”
Serbian policy makers left their main interest rate unchanged today after three straight cuts, saying in a statement that they’ll monitor “risks resulting from developments in global financial markets, especially the Fed’s decision to gradually reduce quantitative easing.”
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.”