Political noise distracts central Europe’s rate-setters

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  • Central bank governors are being fired by politicians.
  • The Hungarian government has been pressured to reduce the amount
  • The Polish government wants to oust the governor
  • Poland, Hungary have been experiencing high inflation for years.

WARSAW/BUDAPEST, Nov 27 (Reuters) – (This story has been amended to change the headline)

The central bank governors of Poland and Hungary are embroiled in a bitter row with the opposition over their accommodative monetary policy, posing new risks for investors willing to back central Europe’s bitterly polarized politics.

In Poland, Governor Adam Glapinski has been accused of trying to boost the economy to help his longtime allies in the Law and Justice party win a new term in last month’s election. Failed.As it turns out.

In Hungary, Central Bank Governor Gyorgy Matolsi is under pressure from Viktor Orbán’s government to further scale back next year’s local and European Parliament elections.

The rows come against a backdrop of regional inflation that remains high in Western Europe, driven by structural factors such as tight labor markets but repeated patterns of pre-election stimulus in recent years.

CEE assets, like the rest of the world, have been highly favored by financial markets as the US Federal Reserve put the brakes on monetary tightening and have so far been protected from losses by the political upheaval.

The election victory of Donald Tusk’s pro-EU coalition a parade properties in Poland. But investors and credit rating agencies are closely monitoring pressure on domestic central banks as inflation remains higher than projected and is unlikely to return to normal until late 2025.

“General monetary conditions and the credibility of CEE central banks were adequate before the recent shocks,” said Karen Vartapetov, lead analyst of sovereign ratings at S&P Global Ratings.

This year and next will put that loyalty to the test.

Reuters graphics

Real benefits

In the year According to a 2021 World Bank study, political intervention in central bank policy has led to sustained high inflation in emerging market economies such as Turkey and Argentina.

Investors’ worries about central bank independence add to long-standing criticism of the rule of law in Poland and Hungary, which have been blocked by the European Union with billions of dollars over fears that democratic standards are lagging behind. Governments have rejected the criticism.

Paul Gamble, head of emerging European sovereign ratings at Fitch Ratings, said: “Policy credibility is a negative rating sensitivity for Hungary and chronically high inflation is included in the negative sentiment for Poland.”

The incoming Polish government cites Glapinski’s move to cut interest rates by a total of 100 bps before the election but stayed after the vote as evidence that monetary policy is catering to the needs of its PiS allies. He is currently building a legal case to bring the governor before the state court.

Glapinski has repeatedly denied those allegations.

When asked to comment to the office, the NBP spokesman said that at all times the authorities were acting legally and that the measures taken to remove Glapinski could damage Polish assets.

“Attempts to bring the president of the NBP before the regional court can be interpreted as a direct attack on the independence of the central bank,” the spokesman said.

The Regional Court consists of lawyers elected by the Lower House of Parliament.

According to local media, the body has handed down only two convictions since the fall of communism and the process of ending Glapinski there could take months. If he is suspended, Lieutenant Governor Martha Keatley will take over.

press release?

In Hungary, all eyes are on how Matolci – a former Orban ally and critic of his economic policy – will reduce government demands by more than 11.5%, the highest in the EU.

Hungary’s central bank has cut borrowing costs by 650 bps since May, avoiding a major cut despite slightly better inflation last week.

ING economist Peter Virovaz said: “While there are many strong reasons to accelerate the rate of reduction, many foreign investors may see this political pressure as a selling point.”

The bank said in February that its base rate could fall to single digits, indicating 75-bp cuts in each of the next two months. Matolsi’s office, whose term expires in March 2025, did not respond to requests for comment.

Polish five-year bonds were up 282 bps against German Bunds on Friday, while Hungarian five-year bonds were up 437 bps. How those conditions develop will depend in part on how investors perceive politics in Poland and Hungary to influence central banks in the coming months.

“All else being equal, the more neutral the central bank is, the more accurate yield you need to compensate for the risk,” said Arif Joshi at Lazard Asset Management.

Additional reporting by Karol Badohall in WARSAW Writing by Gergely Szakacs Editing by Mark John and Toby Chopra

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Gergely reports on Central European economics, central banking and government policy, with his content often appearing in the Macro Issues, Markets, Business and World sections of the website. He has nearly two decades of experience in financial journalism at Reuters and holds advanced degrees in English and communications. Address: 36703775834



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