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Energy costs add to emerging central banks’ inflation headache By Reuters

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© Reuters. FILEPHOTO: Shops reopen as customers wait in line to get in the door following the COVID-19 outbreak in Prague (Czech Republic), December 3, 2020. REUTERS/David W Cerny

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Tom Arnold

LONDON (Reuters – Rising energy costs are fueling inflation in emerging markets. Analysts say this is putting pressure upon their central banks. It also risks limiting growth in Hungary, Poland, and the Czech Republic, and causing more currency weakness for Turkey.

The Czech National Bank (CNB), in a brave response to price pressures, raised its main rate by 75 basis points on Thursday. This is the largest increase since 1997. They cited increased energy prices and supply-chain disruptions as well domestic factors, such as rising costs for owner-occupied homes and services.

According to the prime minister of the country, the hike would be detrimental to the economy. It illustrates the quandary central banks find themselves in when they have to manage inflation that is already above the target level and maintain fragile economic recoveries after the COVID-19 epidemic.

The high price of gas in Europe has risen more than 30% this year, due to low storage, outages, and increased demand. This is a result of factors such as low wholesale electricity prices, rising costs, and the possibility that European economies will rebound.

Analysts at Goldman Sachs (NYSE;) said that Romania, Poland and Hungary were more vulnerable than the rest of Europe to the increase in consumer prices. Their energy and utilities accounts for a significant portion of their consumer-price index baskets. However, their electricity supplies are less exposed to carbon-intensive resources.

Turkey was also beaten down last month, as electricity prices rose by 15% and industrial usage has fallen by 15%.

Consumer prices had generally grown by more in countries where the economic rebound had been faster between the third quarter of 2020 and the second quarter of 2021, said S&P Global (NYSE:) Ratings lead economist Tatiana Lysenko, highlighting Poland, Hungary, Russia and Brazil.

Lysenko said that “inflationary pressures within emerging European economies are more persistent than we expected.”

The EMEA central banks will navigate the complex landscape of balancing support for recovery with anchoring inflation expectations, in an environment that supply-side pressures could last longer than anticipated.

Inflation pressures will continue to mount with higher energy prices and rising food prices, as well as tighter labor markets in the Czech Republic and Hungary.

Goldman Sachs projects that the annual inflation rate will be at 4.5% in Romania, 3.9% Czech Republic and 3.7% Poland.

Czech Central Bank said Thursday’s large hike was not the end. It wanted to keep people and companies from being accustomed to inflation exceeding its 2% target.

Hungary will tighten its policy further, with higher base interest rates of 15% in the next months, Barnabas Virag, deputy governor at central bank, said Friday.

Virag’s remarks and the Czech hike provided a boost for both countries’ currencies. The Czech crown hit a one-month high against the euro.

Analysts believe that Poland could also offer a faster than anticipated hike.

Citi analysts stated that they expected Poland to raise its rates in March 2022 or April 2022. However, they said faster than anticipated hikes are possible if they feel more positive about economic growth.

However, Turkey will likely be an exception. Turkey’s President Tayyip Erdogan is known to be a proponent of stimulus, often overtaking a traditional approach to monetary policies.

The central bank cut its policy rate to 16% last month, despite inflation exceeding target of 19.25%.

David Rees stated that Turkey is the most susceptible to rising energy prices because they have historically led to its balance of payment to deteriorate due to increased import costs. Schroders Senior emerging market economist (LON)

The lira is under increasing pressure following the surprise rate reduction and could continue to fall if prices for energy rise.

Recent record-breaking lows in the lira have rekindled memories of 2018’s currency crisis, and are threatening Turks’ earnings.

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