Via Societe Generale’s FX & Rates Corporate Research,
The possibility of the ECB announcing sovereign asset purchases on 22 January already led Switzerland’s SNB to move pre-emptively last month and introduce negative interest rates. As disinflationary pressures spill over from the eurozone to trading partners in the north and east of Europe, we parse over the central banks that stand ready to act should the ECB announce QE.
Inflation-deflation
The sharp drop in inflation as a result of lower energy prices has not been unique to the eurozone, but important differences have emerged in terms of how quickly prices have tumbled in some countries, responding in different degrees to the resilience of the respective currency, the state of domestic demand and the feed through of cheaper oil. Low inflation and intermittent periods of deflation, for example, have been the norm in Switzerland since the second half of 2011, and falling prices have also manifested themselves in Sweden since November 2012 and for a longer period in Greece and Spain as government measures were rolled out to increase savings and boost competitiveness.
But more recent declines in inflation and falls in outright deflation have occurred in Eastern Europe, resulting in depreciating currencies. Without a credible programme of QE by the ECB and the stabilising of inflation expectations in the eurozone, the exporting of disinflation from the eurozone to its main trading partners in the north and east of Europe will keep central banks pulling the conventional and in some cases, unconventional policy levers.
As the graph above illustrates, both Hungary and Poland are already observing deflation, and the Czech Republic is close to seeing CPI fall into negative territory in annual terms. Interest rates have accordingly already been cut aggressively to 2.10% in Hungary and 2.0% in Poland. Having lost 2.6% against the EUR already this year, the CZK is the worst performing currency after the RUB. The scope for inflation to stay low is at the heart of our EM team’s bullish view on local fixed income but more bearish view on EMEA FX. The Nordic currencies including the SEK and NOK have already cheapened considerably in real terms and may be due for a rebound over the more medium term, but in the short-term the possibility of further central bank action and volatile oil prices may keep investors steering clear of both currencies.
