Low interest rate environment continues
2013 was characterised by further quantitative easing on the part of the main central banks. The European Central Bank (ECB) reduced its headline interest rate to 0.25 per cent in two steps of 25 basis points and announced that the rate would remain at close to zero for some time to come. Inflation in the euro zone declined during the course of the year, falling to a historical low of just 0.8 per cent in February 2014. In January and February 2014, the US Fed began to gradually reduce its monthly bond purchases from USD 85 billion to USD 65 billion. The headline interest rate in the USA is expected to remain extremely low until 2015.
Long-term interest rates retreated slightly from their historical lows during the course of the year. The effective yield on ten-year German government bonds rose to 1.9 per cent at year-end, while the yield for ten-year US Treasury bonds amounted to 3 per cent.
Most of the central banks in Central and Eastern Europe initiated or pressed ahead with cycles of interest rate cuts in 2013. Inflation declined sharply throughout almost the entire region on the back of falling food and energy prices, thereby supporting real household income. The lower interest rates also provided an incentive for increased private consumption and capital expenditure. Unlike the industrialised nations, however, many countries in Central and Eastern Europe are also maintaining positive real interest rates with a view to boosting capital formation in the longer term.
Macroeconomic stability in Central and Eastern Europe
The upturn in Central and Eastern Europe is slowly gaining momentum once more. While GDP in the euro zone contracted by 0.4 per cent in 2013, the CEE region generated growth of around 1.1 per cent. Although this does not yet represent a return to the high growth rates seen prior to the 2008 financial crisis, which were stimulated by international investment to a large extent, many economists are of the opinion that the region now has a more balanced growth model. Public finances in most of the countries are now enjoying healthy development. Romania and Hungary were among the first countries to leave the EU’s excessive deficit procedure in 2012. With the exception of Poland and Croatia, all of the EU member states in Central and Eastern Europe met the Maastricht deficit criteria. Indeed, with a very small number of exceptions, government debt ratios are significantly below the equivalent figures for Western Europe.
At present, there is only a limited risk that the economy in Central and Eastern Europe will overheat due to the excessive expansion of credit. Poland, the Czech Republic and Slovakia have stable banking sectors, and most countries are gradually reducing the burdens dating back to the financial crisis. There has also been a correction in terms of external imbalance: the current account deficits that accumulated prior to 2008/09, some of which were extremely far-reaching, have been eliminated or turned into surpluses in almost all CEE nations. Accordingly, the likelihood of corresponding adjustment processes and crises in the coming years has fallen, with developments in Ukraine representing the sole exception.