The conflict in the Middle East will lead to an increase in energy prices and push inflation higher in Central and Eastern Europe (CEE), prompting central banks in the region to postpone interest rate cuts, according to an analysis published by ING.
They emphasize that economies dependent on energy imports will be the most affected, and the initial market reaction will be a strong one.
In the oil market, ING estimates that the Brent price could quickly rise in the range of 80-90 dollars per barrel, with risks of increasing towards 100 dollars, and "in a pessimistic scenario, even up to 140 dollars per barrel, if we see significant and prolonged supply disruptions."
Regarding natural gas, analysts warn that the European market could experience even more aggressive movements, amid risks related to LNG deliveries from Qatar. "If the market starts to include in the price an extended period of disruptions in deliveries from Qatar, TTF could rise to 80-100 euro/MWh," the report states.
Turkey, Romania, and Hungary, the most exposed
According to ING, the CEE region is "traditionally very exposed" to oil shocks, due to its dependence on imports and less well-anchored inflation expectations compared to developed economies.
Turkey is considered the most vulnerable economy, where "a 10% increase in oil prices translates into an additional 1.10 percentage points in inflation." Romania is the second most sensitive country in the region, with an estimated impact of 0.50 percentage points, followed by Hungary, with 0.45 percentage points.
On the other hand, Poland and the Czech Republic are seen as relatively less exposed, due to lower exchange rate volatility and a more diversified energy mix.
Interest rate cuts postponed
From a monetary policy perspective, ING estimates that most central banks in the region will adopt a wait-and-see approach.
"Central banks are expected to prefer to wait for more clarity, and any immediate decision to cut interest rates will be postponed," the analysts note.
Read the full analysis Impact of the Middle East conflict on CEE: Higher energy prices and postponed interest rate cuts / Turkey, Romania, and Hungary - the most exposed on Curs de Guvernare