Policymakers to look through rise in inflation (Feb 10)

Although inflation has risen across much of the region in recent months, policymakers remain in no rush to raise interest rates. For a start, the bulk of the pick-up in inflation has been caused by tax hikes (primarily on alcohol and tobacco) and base effects from last year’s sharp drop in oil prices. Core pressures remain subdued. What’s more, with fiscal policy set to tighten in most countries this year, and the pace of recovery likely to disappoint, it will fall to monetary policy to support the fragile recovery. Accordingly, Turkey, Poland and the Czech Republic are likely to keep rates on hold for most of 2010, and even when rates start to rise, the pace of tightening will be modest. Meanwhile, by contrast, interest rates in Hungary and Romania still have further to fall.