CEE Macroeconomic and Fixed Income Research

Analysts’ View:

RO Rates: The NBR is expected to cut the policy rate by 25 bps today to 2.0%. Inflation continued to stay low in February, printing at only 0.4% y/y which allows for further easing. However, the improving economic growth outlook (we recently upgraded our growth forecast from 2.2% to 2.8% for 2015) speaks against excessive cuts; therefore we expect that today’s step will mark the end of the easing cycle. The mandatory reserve requirements for FX and RON stand at 14% and 10%, which means that the NBR has other tools besides the policy rate to ward off any possible appreciation pressures on the RON if it deems this is necessary. We see 5Y yields at 2.3% both at the end of 1H15 and at the end of this year as well.

PL Rates: Bratkowski, one of the most dovish MPC members, made a comment yesterday that the strengthening of the zloty would not be an argument to cut rates further as the current level of EURPLN does not threaten exporters’ profitability. He would see a reason for further easing only if economic growth slows down. With PMI scoring close to 55 and expectations for a rather solid pace of growth above 3% this year, we see a rather low probability for such a move. This is especially so if inflation bottoms out as expected. Our baseline scenario currently assumes a flat policy rate at 1.5% and we expect the zloty to remain strong close to 4.10 vs. EUR in upcoming months.

Traders’ Comments:

CEE Fixed income: While yields drifted lower across the board in local currency denominated CEE government debt, yields on Eurobonds moved the other way. On an otherwise uneventful day, Poland decided to utilize the combination of lower yields in Europe and high demand for fixed income driven by the ECB’s asset-purchase programme to issue euro-denominated bonds in order to repay dollar debt and refinance in euros. The zloty has lost 20% in value vs USD since the end of June, when the Federal Reserve phased out its monetary stimulus and Poland has USD 953 m of bonds due in July along with another USD 81 m in September and USD 792 m in October. Poland has been actively buying back its USD securities, including USD 401 m of notes that weren’t due until July and October as issuance in EUR becomes increasingly attractive and issued EUR 1 bn of bonds yesterday despite having no debt due in EUR this year. The bond is rated A2/A-/A- (Moody's/S&P/Fitch), maturing 10th May 2027 and priced at a record low yield of 1.02% (or ms + 35 bps) even though the order book was only a modest EUR 1.8 bn. The relatively low bid-to-cover ratio is an indication that investor appetite for fixed income at paltry yields is starting to run up against some resistance. Apparently, equities is the place to be but the carry trade in CEE is not being bolstered by the gains being made in riskier assets. CEE currencies continue to provide monetary policy headaches for central banks in the region as they come under upward pressure but with key rates already so low, the natural lower boundary for yields on fixed income assets seems to have been reached. Any appreciation in FX which results in an unwanted contraction of monetary policy will have to be countered with unorthodox instruments rather than rate cuts so fixed income investors are faced with an unsavoury combination of a bottom in yields plus potential FX intervention from central banks to stem curency gains.