Analysis: Energy prices add to rising central banks’ inflation headache

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LONDON, Oct 4 (Reuters) – Higher power costs are fanning inflation in a number of rising markets, testing the resolve of their central banks and risking stymieing progress in Hungary, Poland and the Czech Republic and extra foreign money weak point in Turkey, analysts say.

In a daring response to the worth pressures, the Czech National Bank (CNB) on Thursday raised its principal rate of interest by 75 foundation factors, its largest hike since 1997. It cited rising power costs in addition to supply-chain disruptions and home components like greater prices in owner-occupied housing and providers. learn extra

The nation’s prime minister stated the hike would harm the economic system, illustrating the dilemma rising central banks face as they attempt to head off inflation, already working above goal ranges, whereas sustaining fragile financial recoveries from the COVID-19 pandemic.

Benchmark European gasoline costs have surged greater than 300% this yr because of components together with low storage ranges, outages and excessive demand as economies rebound, dragging up wholesale electrical energy prices.

The Czech Republic, Poland, Hungary and Romania have been extra uncovered to the rise than the remainder of the European Union as a result of power and utilities account for a comparatively massive share of their shopper value index baskets whereas their electrical energy provides are extra uncovered to carbon-intensive sources, Goldman Sachs analysts stated.

Turkey has been clobbered too, with pure gasoline costs for industrial use and electrical energy manufacturing rising by 15% final month.

Consumer costs had typically grown by extra in international locations the place the financial rebound had been quicker between the third quarter of 2020 and the second quarter of 2021, stated S&P Global Ratings lead economist Tatiana Lysenko, highlighting Poland, Hungary, Russia and Brazil.

“Inflationary pressures in emerging European economies are proving to be more persistent than we anticipated,” stated Lysenko.

“EMEA central banks will continue to navigate a complicated landscape, seeking a balance between supporting the recovery and anchoring inflation expectations in an environment where supply-side pressures may last longer than previously anticipated.”

Emerging market growth revised down, inflation up
Emerging market progress revised down, inflation up

With greater international power and meals costs exhibiting few indicators of easing and the Czech Republic, Hungary and others additionally going through tighter labour markets, inflation pressures ought to linger.

Goldman Sachs forecasts inflation for the yr at 4.5% in Romania, 3.9% within the Czech Republic and three.7% in Poland.

The Czech central financial institution stated extra price rises would observe Thursday’s huge hike because it aimed to stop folks and corporations from getting used to inflation overshooting its 2% goal.

Hungary plans to tighten coverage extra too, with base rate of interest hikes of 15 foundation factors within the coming months, deputy central financial institution governor Barnabas Virag stated on Friday.

Virag’s feedback and the Czech hike gave a lift to each nation’s currencies, with the Czech crown hitting one-month highs towards the euro.

Poland may be tempted to ship an sooner than anticipated hike, say analysts.

Citi analysts stated they anticipate Poland to ship its first price hike in March or April 2022, however they added that faster-than-expected hikes have been potential if the financial institution grew to become extra assured in regards to the energy of financial progress.

Turkey is more likely to show an exception, nonetheless. President Tayyip Erdogan’s want for stimulus usually trumps an orthodox method to financial coverage.

Despite inflation working above goal at 19.25%, the central financial institution final month slashed its coverage price by 100 foundation factors to 18%. learn extra

“Turkey is most vulnerable to higher energy costs as they have historically caused its balance of payments to deteriorate as import costs have increased,” stated David Rees, Schroders senior rising markets economist.

“The lira has come under pressure after the recent surprise rate cut and may continue to sell-off if energy prices rise further.”

The lira has slumped to file lows just lately, reawakening recollections of a 2018 foreign money disaster and eroding the earnings of Turks.

Reporting by Tom Arnold; Editing by Hugh Lawson

People shop at a local market, amid the coronavirus disease (COVID-19) outbreak, in Istanbul, Turkey September 14, 2021. REUTERS/Dilara Senkaya

Customers queue in front of the re-opened shop, as restrictions ease following the coronavirus disease (COVID-19) outbreak in Prague, Czech Republic, December 3, 2020.    REUTERS/David W Cerny

People shop at a local market, amid the coronavirus disease (COVID-19) outbreak, in Istanbul, Turkey September 14, 2021. REUTERS/Dilara Senkaya

Emerging market growth revised down, inflation up