Inflation Shock and Monetary Policy

The war in Ukraine triggered the most substantial surge in inflation rates in decades, posing a formidable challenge for the central banks of Central and Eastern Europe (CEE) to curb inflation without compromising the ongoing post- Covid recovery. This chapter provides a brief discussion of the factors contributing to the inflationary pressure and evaluates the monetary policy responses in the region. The root cause of the inflationary pressure lies primarily in supply-side shocks disrupting international trade channels as a consequence of the war. Countries with loose monetary conditions witnessed the most pronounced spike in inflation rates in the aftermath of the war. Despite these challenges, central banks responded promptly, implementing aggressive interest rate hikes, keeping monetary conditions tight throughout 2022 and well after inflation rates began to decrease in 2023.