CEE Macroeconomic and Fixed Income Research

Analysts’ View:

TR Rates: In a more dovish than expected move, the CBT not only cut the policy rate by 25 bps, but also cut the upper boundary of the interest rate corridor by a more visible 50 bps which could render the TRY more vulnerable. A rate cut was hardly justifiable given the TRY’s depreciation, the disappointing disinflation pace and the increase in long-term bond yields. This may strengthen the impression that the CBT is under political pressure. Obviously, the TRY will not feel the hit as long as global risk appetite is supportive for the EMs, but this is not good for the TRY's resilience. Although the decision is supportive for short-term yields, their sustainability will depend on the market’s expectations with regard to the Fed’s tightening path. We continue to expect the CBT to go for a 25 bp rate cut within 1H15, but we remain cautious for 2H15 and foresee an increase in the funding costs for banks. Accordingly, our two-year bond yield forecast is 8.5% and the USD/TRY forecast is 2.59 for the year-end.

HU Rates: In line with expectations, the Hungarian central bank kept the base rate unchanged at 2.1%. In their previous press release, they indicated that the level of the interest rate is consistent with the medium-term achievement of the inflation target. But now they modified the wording of the press release; in line with the March inflation report and revised inflation and macro figures, they will now consider the necessity of further monetary easing. In our view, from March onward they may cut rates again because the downward risks in the inflation trajectory have increased and inflation is at an historically low level (- 1.4% y/y in January). However, the decision should not surprise the market and, indeed, the EURHUF only rebounded slightly from 305 to 306 following the announcement before succumbing to downward pressure to end the day a tad above 305. We continue to assume that the expected decline in interest rates will not help the HUF though and stick to our EURHUF forecast of 316.5 for the end of 2Q15.

Traders’ Comments:

CEE Fixed income: CEE government bonds continued to make gains following the accord between Greece and its creditors in a typical Eurozone fudge and will also get a boost today after Janet Yellen made clear that a surprise rate increase from the Fed is not imminent. HGB yields moved most, helped by the MNBs late acknowledgment that monetary conditions are too tight in Hungary (see above). Croatian bonds are looking increasingly attractive in terms of the carry trade especially given the central banks recent interventions in the FX market to strengthen the HRK. The newly elected President, Grabar-Kitarovic, publicly called for the PM to resign which only goes to amplify the already very apparent weakness of the Croatian economy and the political frictions this brings with it but we still expect solid demand for the widely expected Eurobond now that a Grexit is off the table and the HNB has a proven track record of maintaining FX stability.