Berlin - Surging inflation across Central Europe is fuelling interest rate pressures across the region with Hungary expected to lead the way by delivering a hike in borrowing costs on Monday. "Given the continuing upside risks due to energy prices and elevated wage growth, we expect the majority of the (Hungarian) central bank's monetary policy committee to support a 25-basis-point rate increase at its meeting," said Raffaella Tenconi, emerging market economist with the Dresdner Kleinwort investment.
Hungary's widely expected 25-basis-point rate increase will lift the cost of money in the nation to 8.75 per cent and set the stage for a series of hawkish meetings to be held next week by the central banks in the European Union's four leading new member states.
But while economists expect the monetary authorities in Slovakia and the Czech Republic to refrain from increasing rates when they meet this week, Poland's national bank is forecast to follow Hungary and deliver a 25-basis-point rise in borrowing costs when it convenes in Warsaw on Wednesday.
This will bring key interest rates in Poland, which is Central Europe's biggest economy, to 6 per cent with the region's push to higher rates to screw down on inflation coming against the backdrop of signs that economic growth could slip back a gear this year.
Underpinned by rising energy and food prices, headline inflation in Poland rose by 0.8 per cent month-on-month in May to reach an annual 4.4 per cent, pushing consumer prices further away from the central bank's target of 2.5 per cent plus or minus one percentage point.
Moreover, analysts believe that the monetary authorities in Warsaw might still have scope to push up rates further as the year unfolds.
Poland clocked up an annual first-quarter growth rate of 6.1 per cent as household spending and investment growth accelerated.
"Given the strength of the Polish economy, chances are that the National Bank of Poland could be thinking of delivering one additional hike (to 6.25 per cent) later in the summer before ending its monetary tightening cycle," Danske Bank analysts wrote in a note to clients.
Hungary's central bank is also tipped by many analysts to tighten again in July or August.
Adding to the upward pressure on borrowing costs in Central Europe is the increasing tough talk on rates by the world's leading central bankers, in particular European Central Bank chief Jean-Claude Trichet.
Expectations of higher rates are also helping to underpin a strong performance by currencies among the leading new EU member states, which has had the result of clamping down on inflationary pressures while allowing the central banks to buy for time on monetary policy.
However, the US Federal Reserve is expected to add to global inflation fears when it sharpens its tone about the threat posed by resurgent consumer price pressures following its meeting next week.
Trichet has already placed investors on notice earlier this month that the pick-up in inflation pressures meant that ECB's 21-head rate-setting council could deliver a 25-basis-point rise in borrowing costs when it meets in July.
The prospects of a rise in the ECB's key refinancing rate has particular implications for Slovakia, which is to become the eurozone's 16th member state in January after clearing the tough hurdles for adopting the euro.
An ECB decision at its July meeting to raise rates from 4 per cent to 4.25 per cent will bring eurozone borrowing costs into line with the current prevailing rate in Slovakia.
The Slovakian national bank has left rates on hold at 4.25 per cent for 15 months in a row as it geared up for its now successful bid to join the euro.
But with eurozone inflation projected to edge up further in the coming months, many analysts are starting to pencil in another ECB rate hike before the end of the year, forcing Slovakia to follow up with a rate rise to ensure monetary conversion with the eurozone.
What is more, inflation in Slovakia hit an annual 4.6 per cent in May, which was its highest reading since September 2006.
At 3.75 per cent, the Czech Republic's benchmark rate is currently 25 basis points below the eurozone and considerably below the rates in the other three leading new EU states.
Official rates in the Czech Republic, which like Slovakia, Poland and Hungary joined the EU in May 2004, have been on hold since February.
The 25-basis-point rise in February was the fifth since May 2007.
But with a tight labour market and projections that Czech inflation could breach 7 per cent in the coming months, analysts are expecting the monetary authorities in Prague to act in the coming months to deliver a 25-basis-point rate increase possibly in August as part of a new rate-hiking cycle.
However, underscoring the dilemma facing the Czech national bank and other monetary authorities around the world, the nation's economy slowed in the first quarter, slipping back to an annual 5.3 per cent compared to a revised 6.3 per cent in the previous quarter.
