CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

HR Macro: Yesterday, the CBS published detailed 2Q GDP figures, with the headline figure decline confirmed at 0.8% y/y, while ESA 2010 methodology shaved off 0.2pp from the 1Q figure (from -0.4% y/y to -0.6% y/y). The detailed breakdown revealed no major surprises. Domestic demand remained the strongest drag – private consumption performance aligned with 1Q output (- 0.5% y/y), while the investment decline steepened to 5.2% y/y. On the other hand, the vivid net export performance prevented a stronger GDP slump, with exports supported by the double-digit growth, with a modest rise in imports. We leave our 2014 GDP forecast unchanged at -0.5%, while we recently revised our 2015 GDP forecast down to 0%, amid a less assuring external demand tone and more conservative investment outlook. Sluggish economic performance underpins our forecast that 7Y bond yields can be as low as 3.5% at end-2014, and only increase slightly to 3.75% till end-1H15.

TR Macro: The economy posted 2.1% y/y growth in 2Q14 on the back of a domestic demand contraction, but the slowdown in domestic demand could not be offset by a slightly stronger contribution from external demand. Despite the weaker than expected 1Q GDP, we maintain our 2014 growth forecast at 3.4% thanks to the upward revision to the 1Q GDP data and the recovery that we expect in 2H. Finance Minister Simsek said that the 4% growth target for this year will be revised down. We do not expect that the fresh GDP data would have any impact on monetary policy, which is rather to be determined by the global developments. The CBT could start tightening liquidity today. We maintain our 9% year-end forecast for the two-year bond yield.

RS rates: At today’s rate setting meeting, we expect the NBS to stand on hold and keep the key rate unchanged at 8.50%. As the main factors that could shape the decision, we see FX volatility, rising uncertainties and delays on the fiscal front, the deteriorated economic outlook, present geopolitical tensions and vanishing effects of low food prices. The NBS will most likely keep its waitand- see tactics until at least the end of the IMF talks, which are announced for mid-October. Depending on the credibility and efforts in the implementation of reforms, the NBS could give the government the benefit of the doubt and cut the key rate later this year, so we keep our YE14 forecast at 8%.

RO Macro: The inflation rate surprisingly fell 0.3% m/m, on the back of cheaper food prices, while the prices of non-food items were roughly stable. On an annual basis, the inflation rate stood at 0.8%, down from 1% in July. It has been hovering below the lower limit of the central bank’s target range for eight months in a row. We think that the central bank will probably again cut the key rate by another 25bp at the meeting scheduled for late September. We stick to our end-year inflation forecast of 2.2%, but downside risks remain. We also maintain our call for 5-year ROMGB yields at 4.1% for December, amid the uncertain geopolitical context and a whiff of populist measures, which is growing stronger ahead of the presidential election.

HU Rates: Central bank minutes confirmed our earlier view that the CB does not plan to further cut the base rate. However, it supports the CB to further maintain the current loose monetary conditions in Hungary, an MPC member said yesterday. The central bank intends to keep the rate low as it seems to consider profitability aspects as well besides price stability. We believe that ECB actions will give the chance for Hungary’s central bank to keep the rate unchanged. Therefore, we change our forecast for the first rate hike to Q1 2016. Consequently, we modify our longterm yield forecasts as well. Although we keep the year-end forecast for the 10-year bonds at 4.8%, we decrease our forecasts for 2015 (to 5.0% eoy from 5.4%), with upside risks due to the expected tightening from the Fed.