Holidays in Eastern Europe turn out to be a bit more expensive

It is hard to swallow for those who are going to spend the summer holidays in Eastern Europe. The currencies of countries such as Poland, the Czech Republic and Hungary have appreciated considerably this year. In fact, apart from the Hungarian forint, the currencies of countries in the region are trading significantly higher than before the Russian invasion of Ukraine.

In the weeks following the start of the war, the forint fell by almost 10%. The damage to the coins of Poland and the Czech Republic was slightly smaller. Apart from a sharp drop in trade with Russia, this was also due to the sharp increase in oil and natural gas prices. Without their own energy sources, these countries rely heavily on imports. And importing suddenly became a lot more expensive.

Turn on the energy market
However, the energy market has taken a major turn in the past year. The price of a barrel of Brent oil has fallen from over $110 to just over $73 in the past twelve months. This slide is a major boost to the balance of payments of Eastern European countries, which suddenly spend a lot less on energy imports. However, that is not the only driver of the zloty, forint and crown. In response to inflation fueled by higher fuel costs, central banks in Eastern Europe started raising interest rates as early as the second half of 2021. This put them about a year ahead of the ECB. Due to this rapid action, in combination with falling energy prices, inflation in the three countries is falling faster than in the rest of Europe.  

Interest rate differentials narrowed
Inflation in Poland, for example, stood at 13% in May. In February it was still 18,4%. Although inflation is still well above the policy rate of 6,75%, the difference of 6,25 percentage points is considerably smaller than the more than 10 percentage points a few months ago – and compares increasingly favorably with the so-called real interest rate of -4% in the European Union. In recent months, the shrinking difference has prompted many parties to hold assets in zloty, kroner and forint. Incidentally, there are all kinds of things that can throw a spanner in the works in the trio's currency advance.

Dark clouds over zloty, forint and crown
This month, for example, the Court of Justice of the European Union will rule on a high-risk mortgage construction that Polish banks offered before 2009. This could cause some unrest in the banking sector. Another uncertain factor is the elections in Poland, which will take place next fall. Moreover, the Eastern European central banks seem to be preparing for a reduction in key interest rates in the course of 2023. This is quite a contrast to the European Central Bank, which does not seem to have finished raising interest rates for the time being. There is therefore a good chance that the magic of the zloty, forint and crown will soon wear off. But in the meantime, a holiday in Eastern Europe is just a little less affordable than it seems.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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