(Erste Bank Research Team)
A busy week awaits us. Tuesday’s Hungarian central bank meeting will be in special focus. Given the bigger-than-expected hike of the ECB, anticipated further tightening of the US Fed, as well as domestic factors – notably the vulnerability of the forint and considerable rate hiking expectations by market pricing – the MNB could increase its rates by at least 100bp. The key rate would thus reach 10.75% (or more if a larger hike occurs). Czechia will release its flash estimate of GDP growth in 2Q22. Impact of the war in Ukraine together with lower consumer demand stand behind the anticipated adverse development. Uncertainty is high though, mainly due to the development of inventories, which have become the most important contributor to GDP growth. We thus expect the Czech economy to have contracted by 1.3% q/q (still growing by 2.1% in y/y terms). Poland and Slovenia will release their flash inflation prints for July. These are expected to have inched up to 15.6% y/y in the former (market consensus) and 10.5% y/y in the latter. Moreover, Croatia, Slovenia and Serbia will publish their retail sales prints for June which should point to a moderation of growth paces (apart from Serbia). Croatian and Serbian industrial production figures for June will likely show a milder, but positive pace of growth. Moreover, June unemployment rates in Poland and Hungary, as well as June producer prices in Slovakia and Hungary will be out, too.
FX market developments
Last week’s key event was the ECB meeting which brought the first interest rate increase in 11 years. The 50bp hike (twice the guidance given in June) ended the era of negative rates. The ECB also introduced a new tool for the even transmission of monetary policy – the so-called Transmission Protection Instrument. The next steps will be data-driven, but the ECB is committed to monetary policy normalization. The euro strengthened in response but has erased the gains since. CEE currencies ended last week mostly on a stronger footing, despite the larger-than-expected ECB hike. The forint appreciated towards 398.7 and the zloty close to 4.75 against the euro, respectively. Even the leu firmed to 4.93 vs. EUR, but the koruna eased a tiny bit to 24.53 vs. EUR. Polish central banker Sura resigned in a surprising move given his term expires in four months – reducing the 10-person MPC to 7 members. NBP Governor Glapinski suggested the central bank may be heading towards the peak of its rate-hiking cycle, a view echoed by MPC member Dabrowski. The forint benefitted from the submission of anti-graft legislation to Hungary’s parliament, aimed at reaching a deal with the EU over its EU funds, and the approval of the 2023 budget. However, relations soured as Hungarian parliament voted to abolish the “ever closer union” expression in EU treaties and proposed severe curtailment of European Parliament powers. Czech Vice Governor Mora said he is in favour of using just interest rates and not the exchange rate as a policy tool, but he deems decisive action necessary to quell inflation. The new Vice Governor Zamrazilova stated she prefers stable rates or a small hike at the next meeting in August.
Bond market developments
Yields on government bonds corrected across most of the region last week. Hungarian and Polish government bonds marked the largest moves as their 10-year yields dropped by 74bp and 82bp, respectively. The most visible exception was the 2028 Serbian bond that saw an increase of 20bp compared to the preceding Friday. The approval of the 2023 budget in Hungary helped, as the fiscal deficit is set to decline to 3.5% of GDP next year, down from this year’s targeted 4.9%. The government is trying to get its fiscal stance on a sustainable track at a time of high inflation, widening current account deficit and a weak forint. Yet, even after the correction, 10Y yield in Hungary remains close to 8.34% – not too far from the 10Y Romanian yield of 8.86%. Romanian yield curve inverted (as the 3Y yield just about exceeded the 10Y one), joining the ranks of Czechia, Hungary and Poland. Fitch upheld the ratings for Hungary and Poland at BBB and A-, respectively. The outlook for both remains stable.
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