CEE Macro Weekly: Inflation below target does not always imply rate cuts

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TOP MACRO THEME(S):

• Interest rate cut much sooner in Poland than in Czechia (p.3) – In Poland, a rate cut is on the horizon as early as March; in Czechia, it appears only very faintly, at the earliest in 2h26.
  
  

WHAT ELSE CAUGHT OUR EYE:

• ROM: Prime minister I.Boloyan announced that budget deficit for 2026 will be set at 6.2% of GDP. Meanwhile, administration reform package which includes restructuring and improving the efficiency of public spending will be approved through the fast track procedure next week.
• CZE: IMF concluded its economic assessment under Article IV consultations and its staff expects a similar pace of growth in 2026 as in 2025 (2.5%) leading to a closure of the output gap. In the medium-term GDP growth will slow down to the estimated potential of 1.8%. In terms of the fiscal policy the IMF assessed that the 2026 budget implies a moderately expansionary fiscal stance. General government deficit may widen to 2.3% of GDP from 2% of GDP estimated for 2025. The need for fiscal consolidation was emphasized in the context of growing spending pressures related to the ageing of the population and sizable investment needs. Staff recommended annual fiscal adjustment of 0.5 percentage points during 2027-2030 in order to converge toward a sustained structural deficit of 1% of GDP. Current monetary policy stance was assessed as appropriate and further stabilisation of interest rates was recommended. In monetary policy context, the need to normalize the CNB balance sheet was emphasized, including a reduction of FX reserve holdings, which are a legacy of the 2013–2017 exchange rate floor that was intended to support the fight against excessively low inflation. A range of IMF reserve indicators shows that their relative level in Czechia is among the highest in the world and the highest in the region (see the chart on the right).
• POL: Under the Article IV consultation, the IMF assessed that Poland has maintained a rapid pace of economic growth, albeit partly at the cost of a sharp increase in fiscal imbalances. In the near term, economic growth is expected to remain solid, supported by significant disbursements of EU funds and the recent easing of monetary policy. Policy priorities should include reducing the fiscal deficit in order to stabilize public debt and fostering innovation to sustain strong productivity growth. The IMF noted that in 2025 the fiscal deficit and public debt most likely increased to around 7% and 59% of GDP, respectively. According to the IMF, under current policies public debt will rise significantly above the EU threshold of 60% of GDP, reaching 78% of GDP by 2031. The Fund recommends a cumulative fiscal adjustment totalling 4% of GDP to reverse this trend.
  
  

THE WEEK AHEAD:

• The most interesting data releases will be concentrated in the second half of the week. On Thursday, we will receive Hungary’s January CPI reading, which may have edged slightly below the upper bound of the tolerance band around the target (PKOe: 2.9% y/y). On Friday, full January inflation data will be published for both Czechia and Poland, where - as always at the beginning of the year - no flash estimate was released. We assume that Polish inflation may have declined to 1.7% y/y. In addition, detailed figures for 4q25 will complement the data on Poland’s full-year GDP growth (3.6%). We estimate that growth in the final quarter came in within the 3.9–4.2% y/y range.