Further rate cuts likely in Central Europe

Inflation in Central Europe and Israel has risen off the lowest points, but remains well below targets. Given the recent declines in global commodity prices, the pattern in July is likely to be mixed and thus broadly unchanged, on average. Poland CPI inflation remains quite low at -0.8% y/y, as both food and energy are still in deflation. In addition, Poland's core inflation at just 0.2% y/y is the lowest in the region. 

"Inflation has been gradually increasing, and a further rise to -0.7% is expected to occur in July, says Barclays. Hungary inflation has picked up a great deal to 0.6% y/y as food inflation has climbed out of deflation, and energy deflation has moderated. We expect inflation fell slightly to 0.4% y/y in July because of base effects", according to Barclays.

In Czech Republic, the central bank held its policy rate unchanged at 0.05% and as expected retained its exchange rate target. Inflation has increased to 0.8% y/y by June and a slight softening in July to 0.7% is expected. Romania also held its policy rate unchanged at 1.75% y/y this week as the government's reduction in VAT on food to 9% from 24% caused a steep drop in inflation to -1.6% y/y in June. The central bank wants to assess underlying inflationary trends and fiscal implications of policy. 

"Further rate cuts are possible. Israel deflation has moderated to -0.4% y/y in June and we predict it rose moderately to -0.3% y/y in July", added Barclays.