War, political tensions and a deteriorating macroeconomic outlook are testing the skills of central banks in Hungary, Poland and Romania. They add up to the region’s third great challenge after the 2008 financial crisis and the transition from communism to a market economy in the 1990s.
Month by month, the central banks are raising interest rates to curb inflation pressures that were already rising before Russia’s invasion of Ukraine in February drove up the prices of oil, gas, metals, food and fertilisers. Yet real interest rates remain deep in negative territory, a sign that more hikes will be needed to reduce or anchor inflation expectations.
For the central banks, the question is how high and fast to raise rates without harming the post-pandemic economic recovery that was taking shape before February. Unfortunately, some factors that might ease their task lie beyond their control.