Central Europe’s financial markets are grappling with increased volatility as political disputes over rate-setting policies engulf the central bank governors of Poland and Hungary. The confrontations add a layer of risk for investors navigating the region’s politically charged environment. In Poland, Governor Adam Glapinski faces accusations of attempting to manipulate rates to favor the Law and Justice (PiS) party in recent elections. Meanwhile, in Hungary, Central Bank Governor Gyorgy Matolcsy is under pressure from Viktor Orban’s government to implement further rate cuts ahead of upcoming elections.
The disputes unfold against the backdrop of persistently high regional inflation, surpassing levels seen in Western Europe. Factors such as tight labor markets and pre-election stimulus patterns contribute to the inflationary pressures. Despite the political noise, the region’s assets, like those globally, have found support in the perception that the U.S. Federal Reserve has slowed monetary tightening, shielding them from significant losses.
The recent victory of Donald Tusk’s pro-EU coalition triggered a rally in Polish assets, but the focus remains on central bankers as inflation continues to exceed targets. Investors and credit rating agencies closely monitor the independence of local central banks amid concerns about political interference. Long-standing criticisms about the rule of law in Poland and Hungary, leading to EU fund suspensions, further heighten worries.
S&P Global Ratings’ Lead Analyst for Sovereign Ratings, Karen Vartapetov, notes that the credibility of CEE central banks will face scrutiny in the coming year. A 2021 World Bank survey highlights the detrimental impact of political meddling on central bank policies, resulting in sustained high inflation in emerging markets like Turkey and Argentina.
Concerns about central bank independence amplify existing criticisms of the rule of law in Poland and Hungary. Billions of euros in funds have been suspended by the EU due to concerns about democratic backsliding, with both governments rejecting the criticisms. Fitch Ratings’ Paul Gamble identifies policy credibility as a negative sensitivity for Hungary and entrenched high inflation as a concern for Poland.
In Poland, accusations against Governor Glapinski include claims of tailoring monetary policy to benefit PiS allies by cutting interest rates ahead of the election. The incoming government is building a case that could see Glapinski facing the State Tribunal, a move seen as an attack on central bank independence. Glapinski denies these allegations, emphasizing the potential impact on Polish assets if such actions proceed.
In Hungary, Governor Matolcsy faces government pressure to further reduce rates, currently the highest in the EU at 11.5%. The central bank has cut borrowing costs by 650 basis points since May, but the recent decision refrained from a larger cut. The outcome will be closely watched by foreign investors, with concerns about potential capitulation to political pressure. The trajectory of real yields and bond spreads over German Bunds will reflect investor perceptions of central bank independence amid evolving political landscapes in Poland and Hungary.
