Budapest, Dec. 11 - Rising food prices across eastern Europe have boosted inflation, posing a dilemma for policymakers, but data from Hungary and Slovakia suggest the peak has been hit in some countries. Hungarian inflation rose to 7.1 percent year-on-year in November, up from 6.7 percent in November, while in neighbouring Slovakia headline CPI slowed to 3.1 percent from 3.3 percent.
The pace of food price rises in Hungary slowed to a monthly 1.4 percent in November from 2.0 percent in October. In Slovakia, it fell to 1.2 percent from 2.6 percent in October.
Data from the Czech Republic on Monday however painted a very different picture as inflation hit a 6-year high of 5 percent, and in Poland, where numbers are due on Wednesday, the food shock will continue to be felt.
"It is clear to me that Hungary is in a different cycle, the main drivers were food and energy prices and that is a short-term inflation problem which will last a few months," said Radoslaw Bodys, emerging Europe strategist at Merrill Lynch.
"In Poland it is not only food inflation but an underlying inflation problem," he said.
According to Merrill, the different structure of food price inflation is shown by rising unprocessed food prices in Hungary and rising processed food prices in Poland, which represent the two extremes of the region.
Polish November CPI is seen at 3.4 percent, according to a Reuters poll, up from 3.0 percent in October and stoked by an economy growing at a mighty 6.4 percent in the third quarter -- compared with just 0.9 percent in Hungary.
Bodys sees Hungarian and Polish inflation converging at around 4.5 percent year-on-year in the third quarter of 2008.
That means Hungary can resume interest rate cuts that were put on hold due to inflation risks and ahead of the 2008 wage round, and Bodys sees rates below 6 percent in 12-15 months.
In Poland, however, Merrill sees interest rates rising from the current 5 percent to 7 percent over the same timeframe.
REPRICING CONVERGENCE
While Hungary is planning on running a tighter budget over 2008 after years of irresponsible spending, Poland's strong fiscal performance will to some extent be eroded by the pro-cyclical budget stance of its recent government.
"To our mind, the difference in the stances of the two authorities ought to be reflected in a smaller difference in risk premium, in terms of inflation expectations and of policy uncertainty," Lehman analyst Silja Sepping said in a note.
Sepping sees the risk premium for Hungary versus Poland falling to close to zero over the next year, compared with the market's assumption that it will fall by only 19 basis points to 95 bps, based on one-year forward curves.
In the Czech Republic, most economists are betting on a rate rise after Monday's jump in inflation, despite the strength of the crown currency, which hit record highs yesterday.
The Czech economy is far more open than Poland's in terms of imports and exports.
UBS notes the Czech Republic and Poland share concerns over food prices as well as a tight labour market and strong domestic demand, but it sees Czech rates rising by 25 basis points by end-2008 from 3.5 percent compared with a 75bps rise in Poland.
In Slovakia, the policy response is likely to be to leave rates on hold in the near term at 4.25 percent.
"We believe that the current interest rate differential between the NBS (National Bank of Slovakia) rate and the ECB rate of 25bp is likely to be maintained for a while, owing to our expectation of stable ECB interest rates," Citibank economist Jaromir Sindel wrote in a note on Tuesday.
Romania's rate outlook is more likely to be influenced by the risk that a weaker leu currency could translate into higher food prices.
Although there was a dip in the pace of the rise in food prices to 1.2 percent in November from 1.3 percent in October, inflation remains a concern at 6.7 percent and interest rates are seen rising further from 7.5 percent after 50 bps of hikes already this year.
"November data, impacted by a strong base effect, are not comfortable for the central bank at all ... it is clear that the bank will need to hike rates in January," said Florin Citu, ING Bank chief economist in Bucharest.