IMF Urges Higher for Longer Rates in Eastern Europe on Sticky Inflation

(Bloomberg) -- Central banks across central, eastern and southeastern Europe should keep interest rates higher for an extended period of time as inflation remains elevated, according to the International Monetary Fund.

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Tight labor markets and wage growth above 10% across the region will add to price pressures, the Washington-based fund said in its Regional Economic Outlook for Europe released Friday. That’s in contrast with the western part of the continent, where inflation eases faster and creates more room to cut rates, the report said.

For many CESEE economies “risks are one-sided amid still-high wage growth, stickier core inflation, and persistently high inflation expectations,” the IMF said. They “will need to maintain a tight stance for longer to fully rein in inflation.”

Some central banks across eastern Europe, including in Hungary and Poland, were among the first to start cutting interest rates last year after inflation began to show signs of easing.

Policymakers in Warsaw have since kept borrowing costs on hold, arguing price pressures may flare up later this year. In Hungary, investors expect a more gradual easing as officials meet next week. Romania has kept rates unchanged for more than a year.

“In many CESEE economies growth will rely more and for longer on consumption, because higher wage growth will require tight monetary stances for longer,” the IMF said. “Consequently, beyond a cyclical rebound from the 2023 trough, investment in CESEE countries is expected to take somewhat longer to recover.”

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