CEE Macroeconomic and Fixed Income Research

Analysts’ View:

HU Rates and FX: The Monetary Policy Council decided to lower the base interest rate by 15 bps to 1.95% yesterday. The decision was more-or-less in line with both our forecast and market consensus as a 20 bp cut was broadly expected. The decision is justified by the subdued inflation outlook. The staff of the NBH upgraded their growth outlook from 2.3% y/y to 3.2% y/y, while the CPI trajectory was cut from 0.9% y/y to 0% y/y for this year. According to the forecast, the 3% inflation target will be met in early 2017. The MPC decided to keep the current 3% inflation target intact and added an ex-ante tolerance band (+/- 1%point). The rate-cutting cycle will likely continue in April. In our view, the new cycle may end in June when the key rate reaches 1.5%. By the end of the trading day yesterday, the EURHUF broke the 300-level for the first time since January 2014. Our current forecast for the EURHUF envisages an increase to 316.5 by the end of 2Q15 but we have now put our EURHUF forecast under revision.

PL Macro: The unemployment rate came out as expected at 12% in February, confirming the continuing improvement of labour market conditions. Not only did the number of registered unemployed visibly drop in comparison to the previous year, but the number of job offers increased as well. We expect further improvement in the labour market, which is positive for private consumption. Despite the positive economic outlook we expect yields to remain low (10Y POLGB at 2.1% by mid-2015) as external factors seem to be more important bond market drivers.

Traders’ Comments:

CEE Fixed income: While the HUF reacted quite strongly to the lower than expected rate cut from the MNB, HGBs were underwhelmed in the wake of a strong rally heading into the decision. Overall, sovereign debt was largely unmoved in yesterday’s trading session and FX markets were calm with a tendency toward strength vs EUR in the higher yielding HUF and PLN vs a tad of weakness in the CEE funding currency of choice, the low yielding CZK but it would be step too far to conclude from this that the carry trade is once again in full swing. In fact, turnover is low and investors seem cautious at these low yield levels in general. Elsewhere, Credit saw a small bounce yesterday as buyers took advantage of the recent widening to add risk. Although sizes are not huge and spreads are yet to benefit it was a small relief at least. Flow wise we continue to see demand for RBIAV subs across the curve whilst Erste continues to flop around. With a 4% yield differential the switch looks compelling. RBI numbers out today confirm the path to recovery with RWA sales, cost reductions and with a confirmed 10% fully loaded CET1 the bonds should continue their bounce.