CEE: Inflation relief reshapes the rates outlook
The desk interprets the recent shift in Central and Eastern European monetary policy, highlighted by softening inflation, as a potential catalyst for easing interest rates in the region. Per the full note source, key markets such as Poland are transitioning from expectations of rate hikes to potential cuts, driven by significantly improved inflation readings in recent weeks. The evolving market sentiment indicates a growing consensus on this dovish turn, although a baseline scenario projects rates may remain stable through late 2026. This dynamic will be crucial for FX traders looking to position ahead of further policy announcements and market reactions related to inflation trends.
What the desk is arguing
The desk asserts that declining inflation rates provide Central and Eastern European central banks with increased flexibility to adopt dovish monetary policies. Per the source, Poland's shift from concerns over rate hikes to speculation about cuts illustrates this trend.
Recent developments, such as a surprisingly low inflation reading in May and geopolitical dynamics influencing oil prices, have significantly altered market expectations. The National Bank of Poland's possible shift in policy could align with speculative moves in fixed investment driven by the Recovery and Resilience Funds.
Where it sits in our coverage
Our consensus target for EUR/PLN is currently 1.075, with the following specific forecasts: - jpmorgan: 1.10 (Mar-26) - bofa: 1.04 (Mar-26)
The desk's view aligns with the forecast from jpmorgan, indicating a more bullish stance towards the PLN as easing measures gain traction. If the narrative shifts towards rate cuts occurring sooner than anticipated, it may push our target towards the upper end of the expected range.
How other firms see it
Firms like jpmorgan and others are aligned with the desk's dovish outlook for Poland, anticipating that lower inflation will likely lead to rate cuts. Conversely, bofa maintains a more cautious approach, projecting a lower target amidst this inflation relief narrative.
The trajectory of EUR/PLN reflects these monetary policy shifts, with the upcoming discussions surrounding the NBP's stance being a critical factor to monitor as well.
What the calendar says
No high-impact events are scheduled in the next month, limiting immediate catalysts; however, traders should remain alert to any unexpected inflation data releases that may provoke a shift in sentiment regarding the NBP's policy direction.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Central and Eastern Europe is experiencing easing inflation, influencing rate outlooks positively.
- 02Poland's monetary policy may turn dovish, with interest rate cuts becoming a viable option post-2026.
- 03Lower inflation rates have shifted market expectations dramatically from hikes to potential cuts.
- 04Investor sentiment is critical, as anticipated policy changes could impact positioning in EUR/PLN.
Market implications
Watch for further inflation data releases from Poland, which may drive market sentiment and influence positioning ahead of the expected dovish turn in monetary policy. A sustained trend in decreasing inflation could lead to adjustments in the current consensus forecasts.
Risks to this view
A resurgence in inflation or unexpected economic data could invalidate the current dovish outlook and force the National Bank of Poland to reconsider its stance, potentially leading to maintaining or even increasing rates.
Articles CEE: Inflation relief reshapes the rates outlook Published 11:03 Czech Republic Hungary Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Central and Eastern Europe starts the second half of the year with softer inflation and a more dovish rates outlook. Poland has shifted from rate hike fears to speculation about cuts; Czech rates are likely to stay on hold, while Hungary offers the clearest recovery story as inflation eases, allowing the central bank to cut further Frantisek Taborsky , Rafal Benecki , David Havrlant and Peter Virovacz Lower inflation is giving Central and Eastern European central banks greater room to support growth through easier monetary policy Poland: From hikes to cuts? Inflation prospects have improved markedly in recent weeks, while the growth outlook remains solid.
Looking ahead into the second half of the year, we see three key issues to watch: A potential dovish twist in the National Bank of Poland's (NBP) monetary policy (a rate cut in 2026 is not our baseline scenario). The 2027 budget project before next year's general elections. The cumulation of projects financed from Recovery and Resilience Funds (RRF) and its impact on fixed investment.
The surprisingly low inflation reading in May, together with the US-Iran peace deal and the resulting fall in oil prices, shifted market expectations dramatically. At the start of June, markets were pricing in three further rate hikes; they're now pricing in rate cuts. Throughout the entire US-Iran war, we held the view that the NBP would keep rates unchanged.
Our baseline scenario still assumes that rates will remain on hold until the end of 2026 as we see CPI slightly above the target of 2.5% year-on-year. But we expect mounting speculation about rate cuts after the summer. In our view, the next move in monetary policy might be a cut, but this is more likely to come in 2027, when we see inflation dropping slightly below target.
At the end of August and beginning of September, investors are likely to focus on the draft bill of the 2027 budget. With general elections scheduled for next year and several fiscal promises from the previous election campaign still undelivered, we do not expect any meaningful fiscal consolidation. At the same time, the sizeable fiscal deficit leaves little room for significant new spending or rate cuts.
The completion of the RRF programme is drawing closer, and the final wave of EU funding should provide a further boost to investment activity. Poland is due to receive a further €8bn from the RRF in September, followed by the final, and largest, payment of €12.6bn in December. Czech Republic: Modest inflation amid a still sub-potential output Czech Inflation surprised to the downside in June, mainly due to a sharp drop in food prices, and is set to land below the target this year on average.
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