August’s inflation rate of 9.4% yoy was above expectations. The favorable impact of the large decrease in food prices was counter-balanced by a spike in drug prices. Annual inflation rate might reach 8% at the end-year, but the uncertainty to this forecast is very high.
As inflation is decreasing and the next interest rate decisions are ahead, central banks must not only decide on interest rates, but also if or in which manner they intend to intervene in FX markets. In this regard, we see different tendencies. In Romania, strong capital inflows support the currency. However, weak fundamentals cast a shadow on the EUR/RON exchange rate. In case of a strong weakening, the NBR has enough means to defend the currency. The SNB has been strengthening the Swiss franc for some time now to dampen inflation, while the CNB formally ended the intervention regime, triggering a slight weakening of the Czech koruna. In Albania, the strong performance of the lek in recent months led the Bank of Albania to announce interventions aiming to depreciate the currency, supporting exports. Recent turbulences considering the rouble sparked discussions between the CBR and the Ministry of Finance about the need for further FX market restrictions. In this risky global environment, central banks have their hands full. To intervene or not to intervene, that is the question.
This issues features
In the global arena, we have recently witnessed divergent developments. While economic data in the USA have recently surprised positively, the numbers on the other side of the pond have not been quite as convincing, somewhat fueling recession fears. This week, however, the focus is on the decisions of the two major central banks, the Fed and ECB. Ahead of the central bank meetings, EUR/USD attempted to break out to the upside but proved to be rather volatile. In contrast, the Swiss franc moved more in the opposite direction, reaching lows not seen in a long time. The Swiss National Bank (SNB) is likely a significant factor in this trend. Another interest rate decision is due in the Czech Republic next week, with bets on a faster rate cut weighing on EUR/CZK. In SEE, the currencies perform strongly. Particularly, the Albanian lek is appreciating further, supported by an excellent tourism season. On the other hand, in Russia, the rouble is still struggling with a weakening trade surplus.
This issues features:
While the major central banks are now debating about when to conclude their hiking cycles, in CE it is already about the timing of cuts. This results from a rapid disinflation, gradually visible also in core inflation. However, upside risks remain stemming especially from labour markets. Therefore, the easing cycles will take longer than the hikes but by the end of this year rates should be in decline in CE, with Romania following in 2024. Hikes may still be on the cards in Serbia, and even more in Albania.