World Economy

East EU Forced to Cut Interest Rates

East EU Forced  to Cut Interest Rates
East EU Forced  to Cut Interest Rates

Low inflation, flagging growth, and the European Central Bank’s stimulus bias will probably force eastern members of the European Union to cut interest rates to record lows this week.

Reduced borrowing costs will be cemented in three monetary policy decisions on consecutive days before the outcome of the ECB’s deliberations on Nov. 6, economists predict. They forecast Romania and Poland will reduce rates today and tomorrow, while Czech officials will maintain their own benchmark close to zero a day later as they ponder their stance on stemming gains in the koruna, Bloomberg reported.

Prone to contagion from economic woes in the euro region, their main export market and source of funding, eastern European countries keep a close eye on policy moves in the single currency area. Now they’re facing border-jumping deflation and ECB loosening that are making the zloty, the leu and their peers stronger and endangering slowing growth.

“You have the disinflation trend passing through, you have the ECB policy driving the currency side,” Simon Quijano-Evans, the London-based head of emerging-market research at Commerzbank AG, said by phone yesterday. “If central banks were not to react correspondingly, you’d have downside pressure on growth appearing as well. We don’t really see any major inflation pressure, so there is no real need to keep rates on hold at these sorts of levels.”

Romanian policy makers will lower the nation’s key rate to an all-time low of 2.75 percent, according to 10 of 12 economists in a Bloomberg survey. Polish rate setters will deliver a quarter point reduction to the benchmark rate of 2 percent Nov. 5 meeting, according to 27 of 37 economists surveyed by Bloomberg, with seven predicting a deeper cut. The Czech central bank, which has capped koruna gains after cutting to a “technical zero” of 0.05 percent, meets Nov. 6.

 ECB Pressure

With the recovery in the 18 euro-area nations coming to a halt in the second quarter and its inflation forecast staying below 1 percent for a 13th month in October, the ECB is under pressure to consider additional easing. It implemented a new round of stimulus to ward off deflation by buying covered bonds last month and is scheduled to meet again on Nov. 6.

That may prompt 50 basis points of easing, including this week, by end-March in both Poland and Romania , according to Quijano-Evans, and 40 basis points of cuts to Hungary’s main rate, which is at a low of 2.1 percent.

Even Czech rate setters may discuss further easing this week, according to Jan Bures, an analyst at CSOB AS, the Czech unit of KBC Groep NV.

Poland’s central bank will also publish new forecasts following this week’s meeting after the International Monetary Fund said inflation may return to 1.5 percent, the lower end of the central bank’s tolerance range, only at end-2015. While Polish growth may hover at about 3 percent this year and in 2015, the outlook “is clouded” by a slower expansion in the euro region, the Washington-based fund said after a staff visit last week.