CEE should benefit from fiscal impulse in Germany

On the radar

• Czech National Bank hold the interest rate stable at 3.75% on Wednesday.

• Producer prices in Slovakia landed at 2.4% y/y in February.

• Today there are no other releases scheduled.

Economic developments

Germany passing the legislation regarding the EUR 500 billion fund on infrastructure and climate make us revise the German growth forecast to 0.3% for 2025 (previously 0%) and more substantially for 2026 to 1.4% (so far 0.5%). In the latest CEE Special Report Fiscal impulse switched on we assume a positive spillover effect into the region. As the impulse has a more domestic character and does not originate in external demand stimulus, the pass-through to CEE may be slightly weaker compared to the global impulse. Nevertheless, the lift of market sentiment and anchoring expectations for positive development may lift the overall confidence, becoming a trigger for a higher growth path. We currently estimate the positive impact to range between 0.45 and 0.6 percentage points stemming from roughly 1 percentage point increase in German GDP in 2026 (that we would consider time T on the graph). Similar effects should be expected going into 2027. As far as fiscal stimulus coming from triggering escape clause for defense spending is concerned, we are more cautious. It will depend on the country whether it will decide to use additional fiscal space or not.

Market developments

The Czech National Bank left interest rates unchanged at its meeting today, keeping the main rate at 3.75%. The decision was unanimous, with all seven board members voting for rate stability. Today's decision aligns with macroeconomic developments, as several pro-inflationary data points have recently emerged from the Czech economy. Additionally, increased defense spending, likely financed through higher debt, is expected to exert medium-term inflationary pressure. In Poland, the central banker Dabrowski see equal probability of rates stability throughout 2025 and beginning of monetary easing. -- Romania tapped international bond market for the second time this year to help finance its budget deficit. It sold euro-denominated bonds due in 2032 and 2039 worth in total EUR 2.75 billion that was priced at +400 basis points over mid-swaps and +335 basis points over mid-swaps respectively. As for global news, President Donald Trump signed a proclamation to implement a 25% tariff on auto imports and floated further duties on the EU and Canada. The bond market in the region has been quite stable throughout the week, while EURHUF moved toward 400.

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