‘Whatever It Takes’ Not Enough for Eastern Europe Currencies

(Bloomberg) -- The zloty’s slide against the dollar even after a bigger-than-expected interest-rate hike shows that Eastern European currencies will need more than hawkish central banks to sustain gains.

Poland’s currency is down against the dollar and the euro on Thursday, lagging all of its regional peers. The dip has fully erased the zloty’s advance from Wednesday that came on the back of the rate-setting panel’s decision to increase the policy rate by 75bps to 1.25%.

Investors remain skeptical even though Governor Adam Glapinski invoked Mario Draghi’s famous phrase on doing “whatever it takes” to rein in the spike in consumer prices to the highest in two decades. Concerns range from the lack of a clear outlook for future monetary policy moves, through uncertainty over the bank’s potential interventions in the currency market, to the government’s clash with the European Union over democratic standards.

It’s a similar story elsewhere in the region, whose central banks were among the first to tighten monetary policy in the face of a surge in consumer prices. The Czech central bank raised rates more than analysts’ expectations on Thursday.

One reason for this is quite obvious: the Federal Reserve has just started pulling out of monetary stimulus. Exiting from policy accommodation even without expressing any hurry in plans to raise interest rates was enough to boost the dollar against all G-10 currencies and emerging-market peers.

The other is that Eastern European face more issues than just a surge in inflation. Many countries in the region are facing staff shortages, increasing budget and trade deficits, and supply bottlenecks. The fourth wave of Covid is raging across the region. Poland and Hungary are at loggerheads with the EU, which is delaying their access to the bloc’s recovery funds.

• NOTE: This was a post on Bloomberg’s Markets Live blog. The observations are those of the blogger and not intended as investment advice. For more markets analysis, run MLIV on the Bloomberg Terminal.

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