CEE Macro Weekly: Higher inflation does not close the door on a rate cut

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TOP MACRO THEME(S):

• A surge in fuel prices pushed inflation higher (p.3) – CPI inflation in Poland rose to 3.0% y/y in July from 2.5% in June, broadly in line with expectations. Our estimates show that core inflation edged up to 3.1% y/y. Fuel prices increased by 13.9% m/m adding around 0.6pp to inflation.

WHAT ELSE CAUGHT OUR EYE:

• CEE: S&P assesses that the energy price shock associated with the conflict in the Middle East has worsened the outlook for the CEE economies. The agency has lowered its forecast for the region's average GDP growth in 2026 by 0.4pp to 2.0%, while simultaneously raising its inflation, fiscal deficit and current account deficit forecasts. The forecast for Romania has been revised down the most, with its economy expected to remain stagnant in 2026 before rebounding by 2.5% in 2027. Poland remains the fastest-growing economy in the region despite the downward revision of its growth forecast from 3.3% to 2.9%, which we consider unjustified. GDP growth in 2026 is expected to reach 2.1% y/y in Czechia and 1.3% y/y in Hungary. Rating outlooks remain slightly negative, as countries across the region continue to grapple with high deficits, rising debt servicing costs, defence spending and political tensions. In 2h26, S&P will closely monitor the pace of fiscal consolidation, the absorption of EU funds, the implementation of reforms and policymakers' response to higher energy prices. The greatest rating pressure is concentrated in countries with significant fiscal imbalances and weaker economic policy credibility, particularly Romania, Hungary and Poland.
• CZE: Moody’s rating agency affirmed the Czech Republic’s long-term rating at Aa3 (equivalent to AA− from S&P and Fitch) with a stable outlook, citing solid economic growth, strong institutions, effective policymaking and relatively low, albeit rising, public debt burden.
• POL: Prime Minister D. Tusk said that if fuel prices start rising again, the government might propose a solution reintroducing regulated fuel prices for at least the final two weeks of the summer holidays. Deputy Energy Minister K. Wojnarowski clarified that a limited version of the CPN programme could involve cutting the VAT rate on fuel at the end of the summer holidays, and work on this is already under way with the Ministry of Finance.

THE WEEK AHEAD:

• This week, the focus will be on inflation. We forecast that CPI inflation in Czechia (Wednesday) accelerated to 1.7% y/y in July from 1.5% y/y in June, while in Hungary (Friday) it declined to 1.5% y/y from 1.7% y/y a month earlier.
• On Thursday, the Czech National Bank will hold its meeting and, in our view, will keep interest rates unchanged, including the 2-week repo rate at 3.75%.
• In Poland, the July manufacturing PMI will also be released (Monday), although its usefulness is limited.