ING’s Frantisek Taborsky argues recent Central and Eastern European (CEE) FX and rates gains may not last. Czech inflation data show core rising to 3.1%, reinforcing expectations for a Czech National Bank (CNB) rate hike in November unless geopolitics improve. ING’s separate report warns of emerging inflation risks from energy and food, with higher global prices expected to pass through and undermine the region’s recent respite.

Inflation risks threaten CEE rally

"Market sentiment yesterday was mixed, reflecting a catch-up following Monday’s US close alongside natural gas prices hitting new highs. The latter, in particular, suggests that the CEE region cannot enjoy a respite for long."

"Yesterday’s inflation data from the Czech Republic confirmed a rise in core inflation from 3.0% to 3.1%. Although this is an increase of only one-tenth of a percentage point, it marks the highest figure since December 2023."

"More importantly, the underlying structure and accelerating momentum effectively cement the case for a CNB rate hike in November – barring a significant improvement in the geopolitical situation."

"Speaking of inflation, a new report we released yesterday discussed emerging inflationary risks for the CEE region stemming from energy and food prices."

"Until now, food prices have offset higher fuel costs in the region, keeping headline inflation in check. This dynamic is expected to shift in the coming months as we see a lagged pass-through of global prices into local inflation."

"While we saw a rally in FX and rates yesterday, we do not believe the rates rally is justified at this juncture, given the rising risk of higher inflation and the strong correlation observed recently between interest rates and energy prices. Consequently, we expect these gains to be short-lived."

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