Central and Eastern Europe has experienced a truly remarkable year
During last January’s conference in Vienna, we felt that sentiment around CEE was mostly optimistic, but — to be frank — slightly unenthusiastic. It seemed as though everybody was expecting another solid, but ordinary year ahead. The news about the novel coronavirus in China was very distant.
Fast forward a year and we are living in a completely different world. The pandemic shock has taken a huge toll on growth, people’s livelihoods, our lifestyles and, sadly, on many lives.
Turning to economic and market developments in CEE, we have experienced massive turbulence, especially in the first half of the year. Currencies sold off, bond markets came under pressure and liquidity vanished for a while.
But then came one of the crucial elements of 2020 to CEE: the policy response to the pandemic shock and its extraordinary magnitude. Central banks quickly recognised the gravity of the situation and delivered unprecedented stimulus in the form of rate cuts and/or non-standard measures. Poland and the Czech Republic slashed rates to near-zero and Hungary and Romania eventually joined the NBP in starting bond purchase programmes.
Bond purchases and liquidity injections have resulted in the rapid expansion of central bank balance sheets, particularly those of the Polish and Hungarian central banks. The Czech National Bank already had a large balance sheet since introducing the FX floor back in 2013.
All these have efforts helped the currencies to stabilise and bonds to outperform.
With the recent positive news about vaccines, 2021 is widely expected to see a gradual return to normal life. Perhaps we can all meet in person again in Vienna in January 2022.
But with the expected growth recovery and improvements in sentiment, what does this mean for the future development for CEE markets and what can we expect from policymakers? Central banks will start the new year with rock-bottom rates and — in many countries — bond purchase programmes ongoing. Should we expect this monetary stimulus to be scaled back in 2021, or would that be too soon? What would happen if the central bank purchases disappeared from the bond markets? And what are the possible long-term consequences?
We will be addressing these questions in our workshop, hosted by Société Générale, under the theme of ‘CEE central banks’ balance sheet expansion: a necessity or a risk?’ Please tune in virtually, we hope to see you in person again next year.