CEE Macroeconomic and Fixed Income Research

Analysts’ view

HU Rates: The MPC of the MNB decided not to change the base interest rate. Thus, the key rate remained at 2.1% in January for the sixth consecutive time. According to the MPC’s statement, the inflation target will be met in 2H16, and they saw no need to change the base interest rate. The MPC had no room to cut the rate this time as it would have eroded their credibility, in our opinion.
We believe that the MPC is not keen on surprising financial markets by delivering a rate cut without any preparation. Although risks are tilted to the downside, we keep our forecast unchanged (flat key rate until end-1Q16) until we see some indication in the MPC’s official communication that they see room to further reduce the base rate. Markets have already priced in rate cuts as FRAs expect the key rate to be reduced to 1.75% in six months’ time.

PL FX: Deputy Prime Minister and Minister of the Economy, Piechocinski, will announce "the rescue plan" for Swiss franc borrowers today. A week ago, the Minister of Finance, Szczurek, said that the government did not plan a conversion although the Financial Supervision Authority allows this option under condition that Swiss franc borrowers pay the difference between what they have already paid in CHF and what they would have paid, had they taken a PLN loan. Prime Minister, Kopacz, commented that she was ‘on the people's side’ and any solution will burden banks. Although we tend to think that fully unconditional conversion is a tail risk and would be negative for markets, it cannot be excluded given that 2015 is an election year. Although other solutions such as forcing banks to use a negative LIBOR rate are possible, using an exchange rate set by the NBP for conversion, partial or conditional, is also likely to be proposed. We see the EURPLN at 4.17 at end-1H15.

PL Macro: FY14 GDP was in line with our and market expectations at 3.3%, driven by domestic demand. This year, we expect very similar developments, as in our view, growth will maintain the recent pace and investment and private consumption will remain the key positive growth contributors. Two factors support our view - the slowly improving Eurozone outlook, as suggested by leading indicators, and the improving labour market situation, which translate into high consumer confidence and spending levels (positive growth of retail sales at 1.8% y/y in December). The strong economic data supports the hawks within the MPC but the comment from Chojna-Duch that a full assessment should be based on the new inflation projection in March seems to make a cut more likely at the end of 1Q, as we believe that the official growth and inflation outlooks will be revised downward. We have revised our baseline scenario to reflect this.

TR Rates: CBT Governor Erdem Basci held a presentation to introduce this year’s first quarterly inflation report. The CBT sounded confident regarding the disinflation process in 2015 and signaled further interest rate cuts. The next rate cut could even be implemented at an emergency meeting next week depending on upcoming CPI figures. We incorporated a 50 bp rate cut to 7.25% over the next two months into our current forecast and now we see downside risks to this call.

Traders’ Comments:

CEE Fixed income: The headlines surrounding Greece took a turn for the worse yesterday when the new Finance Minister claimed leaving the Eurozone is not an option but defaulting within it certainly is. Add the talk about Greece vetoing further EU sanctions against Russia, throw in some weak US data along with a Russian ratings downgrade and you would think you would get “risk-off” sentiment. Not so in CEE with the exception of Croatia, Serbia and, most notably, RBI. Strabag, the Austrian based technology group for construction services, is also undeterred and began taking IOIs for a BBB- rated fix coupon 7y bond with an expected issue size of EUR 200 m. Initial price talk is of midswaps + 135 bps.