German neighbors in East-Central and Southeastern Europe are waiting for some surprises these days.

The economy is coming out of the health crisis better than expected, if you follow the growth figures for the first quarter of the year - and should continue to gain momentum due to falling infection rates and increasing vaccination rates.

In many cases, inflation is higher than forecast and desired by the central banks.

Some central banks in the countries that belong to the EU but not the euro area are therefore putting the brakes on monetary policy.

Andreas Mihm

Business correspondent for Austria, East-Central and Southeastern Europe and Turkey based in Vienna.

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    This is not only done by the traditionally conservative central bank of the Czech Republic.

    In Warsaw, the cooing of the “pigeons” of the Polish central bank recently sounded a little more hawkish.

    In Budapest, at the beginning of the week, the vice president of the central bank even announced the prospect of an imminent rate hike - and surprised the markets on the wrong foot.

    After the “bomb” against the euro, in the words of the ING analyzes, Hungary's forint promptly rose to its highest level since August and rose to values ​​of around 351 forint per euro at the beginning of the week.

    Hungary's deputy central bank chairman Barnabás Virág had previously announced a possible rate hike in June to tame inflation.

    At 5.1 percent in April, it far exceeded the 4 percent upper band of the medium-term inflation target.

    First rate hike since 2011

    Analysts now assume that the central bank could also raise its inflation forecast at the end of June, which is likely to initiate the first rate hike since the end of 2011.

    The key rate has remained at 0.6 percent since July last year.

    The majority of foreign exchange market experts now expect an initial increase of 0.15 points at the end of June.

    "In the next six months, the official key interest rate of 0.90 percent should have reached the level before the Corona crisis," writes DZ analyst Sandra Striffler. A further tightening is possible in view of the strong economy. The government is cheering them on with high spending ahead of the elections in April next year. Growth forecasts are already being raised. ING economist Peter Virovacz sees Hungary's economy at pre-Corona level in the second quarter of 2021.

    As in Hungary, Poland is recovering from the crisis, and the government's recently adopted spending programs will help. But investors in Poland are also suffering from negative real interest rates. The key interest rate has been 0.1 percent since June, and the annual inflation rate climbed to 4.3 percent in April. The bank does not want the rate of inflation to rise above 3.5 percent in the medium term. This is why statements by central bankers who questioned the benefits of expansionary monetary policy made people sit up and take notice. So far, the markets had expected that there would be no rate hike until well into next year, when central bank positions and chairmanship will be filled. That doesn't seem so certain anymore.

    Recent comments from the Czech and Hungarian central banks indicated that the normalization of monetary policy in Eastern Central Europe could begin earlier, says Malgorzata Krzywicka of Erste Group Bank, summarizing the situation: “If rising inflation and a strong economic recovery, coupled with a normalization of the Politics in the Czech Republic and Hungary, forcing the Polish central bank to react, we could see a stronger appreciation of the zloty. ”With exchange rates of around 4.52 zloty to the euro, the Polish currency has left its weakness from April behind, but is trading much weaker than 4.30 zlotys per euro before the outbreak of the pandemic.

    Rate hike debate expected for June

    Even if the financial and economic data from the Czech Republic have not yet been quite as impressive, the central bank made it clear early on that it would tighten the monetary reins this autumn, which was politically shaped by the parliamentary elections.

    The expected rate of annual inflation in 2021 was increased from 2.0 to 2.7 percent; at 3.1 percent, inflation in April was above the upper target of 3 percent stated by the central bank.

    There, too, the government's spending policy does not meet with unanimous approval.

    The krone reacted accordingly to the suggestion by central bank chief Jiří Rusnok that the debate about rate hikes could begin as early as June.

    Since then the krona has been quoted more firmly with values ​​around 25.5 kroner per euro, almost back to the level from before the crisis.

    Romania, the second largest Eastern European EU state after Poland, impressed again on Tuesday with strong growth data, but inflation is also picking up, most recently to 3.2 percent. The central bank does not have to put too much pressure on it to raise interest rates this year, judge the analysts at ING-Bank, as they are now benefiting from having rather hesitantly lowered the key rate to 1.25 percent.