Central European inflation not as high as expected at end of 2022

Central Europe reported price rises at the end of 2022 that were weaker than expected, data showed on Friday, providing hope that inflation may be close to peaking in some countries.

With inflation at multi-decade highs and central banks likely done with the sharp monetary policy tightening they started in 2021, central Europe is facing a rocky path back to more-stable price growth.

Data on Friday showed Hungarian inflation jumped to an annual 24.5% in December, below a poll forecast of 26%.

In Slovakia, the statistics office said inflation stayed at 15.4% in December, still the highest in over 22 years but below a Reuters poll forecast of 15.7%.

Romania's inflation eased to 16.37% in December and was also below expectations, statistics office data showed.

Final data published on Friday also confirmed a below-forecast inflation rate of 16.6% in Poland in December, while Czech inflation eased to 15.8%, from 16.2%, according to data on Wednesday.

"The December inflation readings brought the clearest evidence yet that the disinflation process in central Europe is taking hold," Capital Economics economist Liam Peach said.

"All of this is happening a bit sooner than most had expected and presents a clear downside risk to the view that central banks in CEE will wait until much later this year before cutting interest rates," he said.

Tight labour markets are still one of the obstacles Hungary and other central European economies are facing to cut inflation to targets, which risks rates having to stay higher for longer.

Rate setters are also wary of January inflation data still to come and specifically what price rises companies will seek.

Inflation in Hungary is the strongest in central Europe, with some government support schemes to ease fuel or utility bills ending in recent months.

The Hungarian central bank also has the highest interest rates, with a base rate of 13%.

Like other policymakers, Hungarian rate setters are seeking to keep rates stable for now to soothe economies being hit by sky-high inflation.

"It's definitely positive that the (Hungarian) headline inflation figure has come in below expectations, so probably the peak in the first quarter will also be at a lower level than previously anticipated," said Orsolya Nyeste at Erste Bank.

Lower fuel prices took some pressure off in markets suchas Romania, Slovakia and the Czech Republic last month.

Romania hiked interest rates on Tuesday, lifting its base rate by 25 basis points to 7%.

"With the peak in inflation safely behind us now and a gradual downward trend to follow throughout 2023, we remain of the opinion that there is very limited scope for more policy tightening and rate cuts can even be envisaged in late 2023," ING said.