Another GDP puzzle and central bank meetings

(Erste Bank Research Team)

Serbia is the next country after Czechia to publish its 2Q22 GDP growth. So far, the economic development in Czechia and the Eurozone has been encouraging, as evidenced by the ongoing q/q expansion. The recession seems to have been put off for the second half of the year. In Serbia, we thus expect to see positive y/y growth dynamics, albeit lowered compared to the first quarter. Later this week, the Czech and Romanian central banks will hold rate setting meetings. In Czechia, another 25bp to 50bp rate hike cannot be ruled out, amid rising inflation. In Romania, the NBR should hike the key policy rate by 75bp to 5.50%, with a non-negligible probability of a 100bp hike. The credit facility rate, which should remain the relevant operational policy instrument under a tight liquidity management policy, should reach 6.50%. As for other data releases, retail sales growth for June will be published in Hungary, Slovakia and Romania, alongside industrial output in Hungary.

FX market developments

Whereas the zloty firmed a bit towards 4.74 vs. EUR last week, the forint depreciated by almost 1.6% w/w towards 403.4 vs. EUR. The Hungarian central bank delivered another sizeable rate hike of 100bp to both the key rate and the one-week deposit rate (which thus reached 10.75%); yet this was not enough to support the currency. The forint remains vulnerable due to unresolved issues over EU funds, worries about gas supply, and a sizeable current account deficit. Moreover, external factors – most of all, the US Fed’s tightening weighed somewhat on local FX as the US central bank raised its key interest rate by 75bp to 2.25 – 2.50%. The Czech koruna has reacted little to the good news of the 2Q22 flash GDP print and remains close to 24.60 vs. EUR. It is gearing up for this week’s central bank meeting. We expect stability of rates at 7%, but see a potential risk of a small rate hike. Similarly, the Czech policymaker Frait stated he “will be deciding between rate stability and a potential slight increase”. This week will also bring another rate hike in Romania. We expect the NBR to increase its key policy rate by 75bp to 5.50% on Friday (with risks of a bigger hike, possibly 100bp). The credit facility rate, as the relevant operational policy instrument, should reach 6.50%.

Bond market developments

Yields on government bonds corrected further over the course of last week, decreasing by 4-21bp at the long end in most CEE economies. The rally was particularly strong in Romania, as the 10-year ROMGB yield plunged by 71bp week-on-week and the spread vs. Polish bonds narrowed to around 230bp. ROMGBs benefitted from a strong 10Y auction last Monday (where RON 2.1bn was issued instead of the planned RON 0.4bn). There are more Romanian auctions ahead this week – the 2025 and 2029 ROMGBs, as well as a planned T-bill auction. Moreover, Hungary will also issue its T-bills on Tuesday. The yield curve remained inverted in Czechia, Hungary, Poland and Romania (10Y-2Y spread, apart from Hungary and Romania where the 10Y-3Y difference is used). The short-end of the curve inched down in most of the region, apart from Poland and Hungary – it only inched up in Poland, whereas the Hungarian 3Y yield rose as much as 47bp w/w. According to the Polish Minister of Finance, Poland is in a comfortable position as over 90% of state budget gross borrowing needs for 2022 have already been financed.

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