CEE Macroeconomic and Fixed Income Research

Analysts’ View:

HU Rates: In line with our expectations and the market consensus, the MPC continued the monetary easing cycle started in March, cutting the key interest rate 15bp to 1.65%. Behind the decision stood the subdued inflation outlook and downward pressure from the Eurozone through imported prices. Furthermore, the second-round effects of low oil prices have not materialized yet. In our baseline, we expect the interest rate to be cut to 1.5% by the end of June. However, there are some downward risks around this. Vice Governor Balog indicated before that the MPC may cut the rate below 1.5% if the inflation outlook in the middle term does not meet with the NBH’s target (in the MPC’s view). Thus, they may continue monetary easing in July. However, we should also mention that, due to the international investor sentiment, the forint has depreciated against the euro since the last Monetary Council meeting. Thus, the downward pressure from that side has eased. We maintain our EURHUF forecast at 305 in 4Q15.

RO Rates: Bloomberg reported yesterday that Governor Isarescu of the NBR said that the central bank is not in a position to carry out quantitative easing and has left “a little bit more liquidity” to keep pushing interest rates lower. Isarescu added that it is not their intention to let this liquidity persist for a long time as ”this would not do us any good as a central bank”. The central bank surprisingly cut the key interest rate to 1.75% earlier this month, but we see further slashes in the key rate as less likely for the remainder of this year. Subsequent reductions in mandatory reserves later this year are more likely to be delivered, but only if further progress in consolidating public finances is reported, especially after the VAT cut on all food products effective from June. A new precautionary accord with the IMF/EU will be a plus in terms of confidence, but only to the extent that commitments from the Romanian side will indeed be followed through. We see the EURRON at 4.49 at the end of this year.

CZ Politics: In line with expectations, the Czech coalition government survived yesterday's no-confidence vote, as the opposition parties were able to gather only 47 votes out of 101 needed. The vote was called in a reaction to a recent decision from lawmakers not to end the state support of tax break for rapeseed-based biofuels, where the current Finance Minister Andrej Babis, as an owner of the chemical conglomerate Agrofert, has a financial interest. In spite of being regularly accused of conflict of interest, Babis's anticorruption ANO party remains a strong leader in opinion polls (general elections are to be held in 2017). As yesterday's no-confidence vote was a rather formal event, we maintain our EURCZK forecast at 27.50 for the end of 1H15.

PL Macro: The unemployment rate dropped to 11.2%, which is the lowest number in six years. The drop was driven not only by seasonal factors as the seasonally adjusted figure improved as well, albeit to a lower extent. The improving labor market is positive for further dynamic growth of private consumption that supports solid growth. The data was neutral for markets as investors keep their focus on Greece and on the aftermath of the outcome of the presidential election. We see 10Y yields at 2.7% at the end of the year.