# Analysis-War in Ukraine puts pressure on East European banks to prop up sinking currencies Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2022-03-04 Category: NEWS Category URL: https://financedigest.com/category/news Meta Title: CEE Central Banks Intervene Amid Russian Invasion Impact Meta Description: Discover how central banks in CEE-4 countries are grappling with currency weakening and inflation as a result of Russia's invasion of Ukraine. URL: https://financedigest.com/analysis-war-in-ukraine-puts-pressure-on-east-european-banks-to-prop-up-sinking-currencieshtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/2022-03-04t155734z1lynxmpei230vvrtroptp4easteurope-markets-1736816013959-compressed.jpg) By Gergely Szakacs and Alan Charlish BUDAPEST/WARSAW (Reuters) – Russia’s invasion of Ukraine is putting pressure on central banks along the European Union’s eastern flank to prop up their weakening currencies, forcing Czech and Polish rate-setters into market interventions and Hungary into prolonged rate hikes. The market sell-off in the wake of the Russian invasion on Feb. 24 and a looming energy price shock in Europe due to a surge in global [oil and gas prices compound already strong underlying price pressures](https://www.financedigest.com/oil-prices-dip-on-u-s-crude-reserve-release-inflation-pressure.html "Oil prices dip on U.S. crude reserve release, inflation pressure") in the region, and the currencies’ sharp weakening could fuel additional inflation. Economists say against this backdrop, the region’s central banks – which have been fighting [inflation with rate hikes since June 2021 – have little choice now but to intervene as needed and tighten policy further even as the growth outlook is set](https://www.financedigest.com/european-shares-set-for-weekly-gain-on-u-s-inflation-outlook.html "European shares set for weekly gain on U.S. inflation outlook") to deteriorate as a result of the military conflict. The implications of the conflict for CEE-4 monetary [policy are firmly](https://www.financedigest.com/why-firms-should-adopt-a-more-mobile-policy-at-work.html "Why firms should adopt a more mobile policy at work") hawkish, in our view,” economists at Goldman Sachs said. While the crisis is likely to have a dampening effect on growth, the combination of [higher commodity prices](https://www.financedigest.com/vhs-tapes-selling-for-46000-higher-than-original-price.html "VHS tapes selling for 46,000% higher than original price") and FX depreciation is significantly inflationary. Moreover, this pro-inflationary shock is occurring at a time when CEE-4 central [banks have been trying to tighten financial conditions to bring exceptionally high inflation](https://www.financedigest.com/boes-bailey-says-rate-setters-can-put-inflation-before-bank-worries.html "BoE’s Bailey says rate-setters can put inflation before bank worries") rates under control. The [recent depreciation of CEE-4 exchange rates](https://www.financedigest.com/the-recent-bank-of-england-meeting-the-biggest-rate-hike-recession-warning-and-the-fallout.html "The recent Bank of England meeting, the biggest rate hike, recession warning and the fallout") is making this task more difficult. Goldman Sachs has raised its forecast for peak [official rates](https://www.financedigest.com/bank-of-england-officials-split-over-future-path-for-rates.html "Bank of England officials split over future path for rates") by 50 bps to 5.5% in Poland, Hungary, the Czech Republic and Romania. On Friday, the Czech [National Bank](https://www.financedigest.com/swiss-national-bank-says-inflation-battle-not-yet-won.html "Swiss National Bank says inflation battle not yet won") (CNB) intervened in the market against excessive volatility and crown depreciation, its first such move since abandoning a cap on the Czech currency in 2017, lifting the unit from 10-month-lows. The CNB, which said “it is active on the foreign exchange market and is conducting operations to mitigate excessive fluctuations and depreciation of the crown”, followed the Polish [central bank](https://www.financedigest.com/dollar-skulks-at-eight-month-low-central-bank-meetings-in-focus.html "Dollar skulks at eight-month low, central bank meetings in focus") in intervening on Friday. The Czech central [bank has already raised rates by 425 basis points since last June to bring its rate to a 20-year high of 4.5% and analysts see chances the bank will raise rates by up to 50 basis points at its next meeting](https://www.financedigest.com/banking-stability-worries-go-behind-closed-doors-at-imf-world-bank-meetings.html "Banking stability worries go behind closed doors at IMF-World Bank meetings") in late March. The National [Bank of Poland also stepped in to prop up its currency by selling foreign currency for zlotys, while the National Bank of Hungary delivered its biggest rate](https://www.financedigest.com/ecbs-villeroy-rate-hike-signals-strong-confidence-in-european-banks.html "ECB’s Villeroy: rate hike signals strong confidence in European banks") increase since late-2008 to rein in the forint from successive all-time-lows. Despite those moves, all three currencies, which started the [year on a strong](https://www.financedigest.com/equity-markets-show-strong-end-of-year-performance-in-camradatas-q4-2017-investment-research-reports.html "Equity Markets Show Strong End of Year Performance in CAMRADATA’s Q4 2017 Investment Research Reports") footing, have remained in the red for the year, with the zloty trading at 13-year-lows. The forint plumbed record lows this week, [falling to 385.97 versus the euro](https://www.financedigest.com/euro-slips-back-below-parity-norwegian-krone-falls-on-planned-cbank-fx-purchases.html "Euro slips back below parity, Norwegian krone falls on planned cbank FX purchases") by Friday afternoon from 372 on Monday. Graphic: A Bad Week- https://fingfx.thomsonreuters.com/gfx/mkt/xmpjoejwmvr/2022-03-04%20Forint%20worst%20week.png [DOUBLE-DIGIT INFLATION](https://www.financedigest.com/analysis-east-europes-party-is-over-as-double-digit-inflation-bites.html "Analysis-East Europe’s party is over as double-digit inflation bites") [Central banks](https://www.financedigest.com/european-central-bank-to-raise-deposit-rate-to-3-25-by-mid-year-reuters-poll.html "European Central Bank to raise deposit rate to 3.25% by mid-year: Reuters poll") cannot do anything other than remain hawkish in the near term, economists at Wood and Co. said in a note, projecting a 2 percentage point drop in 2022 [economic growth](https://www.financedigest.com/different-employee-engagement-outcomes-for-u-s-and-canadian-companies-amidst-continued-economic-growth-pressures.html "DIFFERENT EMPLOYEE ENGAGEMENT OUTCOMES FOR U.S. AND CANADIAN COMPANIES AMIDST CONTINUED ECONOMIC GROWTH Pressures") compared to their previous baseline due to the inflation shock. There is a high risk of double-digit inflation this year, moderating, but staying two-to-three [times the central banks’](https://www.financedigest.com/stock-pickers-reckon-its-time-to-move-on-from-central-banks.html "Stock pickers reckon it’s time to move on from central banks") targets in 2023E,” they said. Economists say rising Romanian [swap yields also signal central bank](https://www.financedigest.com/explainer-what-are-credit-default-swaps-and-why-are-they-causing-trouble-for-europes-banks.html "Explainer-What are credit default swaps and why are they causing trouble for Europe’s banks?") intervention to keep the leu stable. The [central bank](https://www.financedigest.com/no-santa-rally-for-markets-as-central-banks-dampen-peak-rate-hopes.html "No Santa rally for markets as central banks dampen peak rate hopes") has denied comment but it has a long track record of FX interventions to stem large currency volatility. The National [Bank of Poland meets next Tuesday when it is expected to raise its key rate](https://www.financedigest.com/bank-of-england-set-to-hike-to-4-as-rate-peak-looms.html "Bank of England set to hike to 4% as rate peak looms") by 50 bps to 3.25%. The National [Bank of Hungary holds](https://www.financedigest.com/bank-of-canada-seen-on-hold-even-as-economy-accelerates.html "Bank of Canada seen on hold even as economy accelerates") a non-rate setting meeting on Tuesday, which some economists expect to turn into a rate-setting meeting after the bank exhausted its room for manoeuvre with Thursday’s massive hike. The [bank raised its one-week deposit rate](https://www.financedigest.com/bank-of-englands-mann-doubles-down-on-backing-for-rate-hikes.html "Bank of England’s Mann doubles down on backing for rate hikes") to 5.35%, just 5 bps shy of the top of its interest rate corridor. Economists at UniCredit said the NBH could also end up having to intervene this [year if government price](https://www.financedigest.com/germany-home-prices-to-sink-nearly-6-this-year-reuters-poll.html "Germany home prices to sink nearly 6% this year – Reuters Poll") caps to keep a lid on inflation, which rose to a near 15-year-high in January, are removed after an April general election. We believe that [rate hikes](https://www.financedigest.com/stocks-bonds-extend-rally-on-hopes-rate-hikes-ease.html "Stocks, bonds extend rally on hopes rate hikes ease") cannot strengthen the currency on their own. If EUR/HUF remains close to 380 for longer, the FX pass-through could exceed 1pp,” UniCredit said. The NBH has declined comment on direct [market interventions](https://www.financedigest.com/discrete-digitization-to-drive-the-aortic-intervention-market.html "Discrete digitization to drive the Aortic Intervention Market"). (Additional reporting by Jason Hovet in PRAGUE and Luiza Ilie in BUCHAREST; Editing by Elaine Hardcastle) --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---