Regardless of central bankers’ assurances, higher interest rates are set to spread in Europe, according to its biggest fund manager.

Sergei Strigo, the London-based head of emerging-market debt at Amundi Asset Management, is betting that central-bank rates in east Europe’s biggest economies are more likely to follow the Czech National Bank than the European Central Bank on the path toward tighter policy.

Strigo, whose firm oversees 1.3 trillion euros ($1.5 trillion), has been paring positions in the region’s government debt since 2016 based on his view that central bankers will move to raise rates before the European Central Bank eventually does. He’s betting rate setters in Poland and Hungary will have to abandon pledges to keep borrowing costs at record-low levels until as late as 2019 as their economies heat up.

“Going into next year we see these central banks thinking about interest rate hikes as inflationary pressures build up and growth surprises on the upside,” said Strigo. His Global Emerging Local Currency fund has outperformed 92 percent of peers this year with gains of 15 percent.

With growth gathering pace and consumption on the rise, a growing chorus of investors are seeing a surge in wages feeding through to inflation in the region battered by a labor shortage. Strigo says he’s keeping bond duration lower than the benchmark and using interest-rate swaps to hedge against the possible increases.

The Czech National Bank, which delivered Europe’s first rate hike in August, is debating the timing for its next move to tighten as faster-than-expected economic growth and a shortage of workers drive up salaries and prices. Policy makers voted four to three to keep the benchmark rate at 0.25 percent on Wednesday.

Bernhard Matthes, a fund manager at Bank fuer Kirche und Caritas eG in Paderborn, Germany, said he anticipates another Czech rate increase before the end of the year. Poland may follow next year and Hungary later, he said.

“It’s really running hot in the Czech economy, so it’s perfectly appropriate to tighten monetary policy,” he said. Inflation doesn’t pose a similar threat to Poland or Hungary, he said.

Currency markets are painting a similar picture: in the past six months, the Czech koruna has topped all emerging-market peers against the dollar and it’s the only currency to have outperformed the euro. Hungary’s forint and the Polish zloty rank third and fourth.

While the euro zone is poised for the fastest economic expansion in a decade and unemployment is falling, inflation continues to fall short of the ECB’s goal of just under 2 percent. ECB President Mario Draghi is expected to start tapering his asset-purchase program in January and is unlikely to begin increasing rates before the fourth quarter of 2018, trading in the futures market shows.

Eastern Europe’s central banks will probably move earlier than their euro-zone counterpart, Matthes said.

Published Date:2017-09-29