CEE FX: Fiscal divergence and carry risk – BNY

BNY’s Geoff Yu highlights growing fiscal stress in Central and Eastern Europe (CEE) as a key driver for regional FX and carry trades. Romania faces acute fiscal and external imbalances, while Poland and Hungary show better current account and Foreign Direct Investment (FDI) dynamics. Yu expects further fiscal divergence to be reflected in yield curves and currency holdings across CEE.

Romania, Poland, Hungary under fiscal lens

"In the near term, the fiscal stress points with the greatest FX implications are in Central and Eastern Europe (CEE). Despite our hopes for a more assertive approach, no regional central bank appears willing to push for higher rates. As in the U.K., the inflation angle will likely prove transitory, and fiscal is the bigger threat to inflation expectations."

"The recent collapse of the Romanian government points to significant short-term fiscal uncertainty, which is potentially destabilizing for a currency with materially low real rates and very high twin deficits – both nearly hit 8% of GDP as of Q4 2025."

"Poland and Hungary’s fiscal trajectories are also approaching high single-digit percentages of GDP. However, both have seen notable current account improvements over the past two years, and inbound FDI and current transfers – particularly for Hungary post-election – provide a better sustainability profile."

"External circumstances have determined common near-term inflation pressures in the region. However, further fiscal divergence is expected, which should be reflected in currency flow and holdings."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)