The Czech Republic’s Flailing Floor Plans

Czech Republic equities after a 10 percent MSCI loss in 2016 were thrown by December’s 2 percent on-target inflation showing, which could mark abolition of the post-crisis 27/euro currency cap introduced during deflation. Two original peg backers on the central bank board leave in February as speculation mounted that the rate could be freed in the second quarter. Rising oil import prices and food taxes were major causes of the uptick, as the core level stays under 1.5 percent, and officials are cautious about the longer-term trend and also about potential euro weakness against the dollar with Washington’s new fiscal and monetary policies. Despite the government’s increased pro-business leanings the stock exchange has been quiescent with scant trading and offering activity as it reconsiders alliances and platforms with neighbors. Hungary has continued its own route after the bourse’s central bank takeover, designed to encourage small firm access and privatization restart with limited success so far, although it was up over 30 percent last year. Inflation there could return toward 3 percent on labor shortages, but interest rate firming is out of the question with the unconventional monetary approach still stressing discount commercial on-lending. Prime Minister Orban has redirected his fire from Brussels to perceived unelected critics at home, including the Soros Open Society Foundation. In the wake of communism’s collapse his political party was an ally, but in recent years and especially following the Mideast refugee influx, it has been accused of internal meddling and opposing “Hungarian values.” With border fence placement the movement has stopped and the country has tried to divert asylum-seekers to Germany and elsewhere. In Poland, also MSCI-negative in 2016, inflation is within the 2.5 percent mid-range goal with the benchmark rate unchanged at 1.5 percent. GDP growth in Q3 was under 1 percent as the ruling Law and Justice Party got off to a rocky start and alienated wide swathes of the banking community and electorate with hard line mortgage conversion and social issue stances. State insurer PZU’s purchase of a controlling stake shed by Italy’s Uncredit in Bank Pekao will put the largest lenders in government hands for the first time since the 1990s, and overseas competitors  have expressed concern although management and operations will stay independent. Parliament has been gridlocked by a Civic Platform boycott in protest of proposed media and abortion restrictions and the new budget passed with procedures it calls illegal. The standoff coincided with a European Commission notice of “systemic threat” to the rule of law, which Warsaw roundly dismisses.

The maneuvering also overlapped with NATO military exercises led by US forces as Russia moves to regain Eastern Europe sway. Shares have sustained double-digit leaps with recession ending and inflation falling toward 5 percent, but former Finance Minister Kudrin in another economic reform blueprint warned that security was in danger from lagging technology and modernization, including the inability to dismantle state ownership which has surged to 70 percent of output. Privatization plans have been rolled back with higher oil revenue and reserves, which may again enable regular ruble intervention. Despite a “tough year” in the central bank’s words for the banking industry retail giant Sberbank may turn in a $15 billion profit for 2016 with its hold on one-third of assets still an ironclad ceiling.