(Erste Bank Research Team)
It is going to be an interesting week in the region, with the Czech and Hungarian central banks in the spotlight. While the Czech National Bank should keep the policy rate flat at 7.0%, Hungary is likely to manifest its fight against inflation with another 100bp hike so that the key policy rate lands at 12.75% after the meeting. Poland and Slovenia will publish flash estimates of September’s inflation numbers, which are expected to go up. As far as price development is concerned, Hungary and Slovakia have the release of their PPIs scheduled for next week, with footprints expected at around 40% in both countries. Finally, industrial output and retail sales growth in August will be released in Croatia and Serbia. While industry should sustain a modest growth dynamic, retail trade growth should slow, as inflation is biting into consumption. On Thursday, the European Commission will release business and consumer survey results that will give a hint as to how the sentiment has changed during September, indicating further trends in the regional economies.
FX market developments
CEE currencies weakened amidst a flight to safety of the US dollar, as the news of partial mobilization in Russia disturbed markets. Moreover, the US Fed delivered an expected 75bp hike on Wednesday and upped its outlook for interest rates. The forint weakened to 406.3 vs. EUR on Friday. It was affected by the escalation of the EUHungarian dispute as the EU executive recommended suspending around EUR 7.5bn in funding for Hungary over corruption. Yet, investors remained optimistic as the amount is smaller than figures touted before. This week’s Hungarian central bank meeting will be in focus. We expect the MNB to deliver a 100bp hike to 12.75%. Deputy Governor Virag voiced his view that smaller rate hikes are possible going forward, especially if monetary policy effectively transmits into the broader economy – yet, we deem that likely from October only. The Czech central bank’s meeting will also be in the spotlight this week. We expect stability of rates at 7%, mainly due to weakening demand-driven pro-inflationary factors. However, another hike cannot be ruled out, as suggested by MPC member Holub to reduce the risk of a 1970s US-style price shock imposing more severe tightening later – though he remains in the hawkish minority. The koruna was moved by the geopolitical jitters and shifted to 24.66 against the euro. The zloty depreciated towards 4.76 vs. EUR by Friday. Interesting comments came from MPC member Kotecki, who expects the central bank to pause in its rate-hiking cycle to gain greater visibility as to anti-inflation shield extension and energy prices freezes (electricity, gas). Yet, he reckons Poland’s inflation might have already become persistent to some extent.
Bond market developments
In reaction to higher yields on major markets supported by the FED’s 75bp rate hike, yields on 10Y government bonds moved up 20-40bp w/w in CEE. The only exception was Hungary, where some correction of previous robust increases took place last week. Comments from Deputy Governor Virag pointing to ongoing discussions about the end of the current hiking cycle, or less hikes being needed if the tighter liquidity control proves to be efficient, and cooling down of growth expectations sent HUF 6×9 FRAs down 70bp w/w. Romania placed its dual-tranche Eurobonds (4Y, 7Y) on international markets last week with the pricing at MS+245 and MS+405, respectively. This week, Hungary will be selling T-bills along with conducting its regular T-bond auctions, Poland will reopen POLGBs 2024, 2027, 2032 and 2027 floaters, while Romania will reopen ROMGBs 2028.