CEE Macroeconomic and Fixed Income Research

Analysts’ View:

RO Macro: The National Bank surprised the market by cutting the key rate by another 25 bps to a new record low of 1.75%. The central bank also cut the minimum reserve requirements for RON liabilities to 8% (from 10%), while keeping the level of minimum reserve requirements for FX liabilities at 14%. The reduction of the minimum reserve will release about RON 3 bn into the market but this extra liquidity will only increase starting with May 24. We think that the central bank could cut minimum reserves again and see the five-year ROMGB bond yield hovering close to 2.3% for the remainder of 2015.

PL Rates: The NBP left the policy rate flat at 1.5%. The decision was no surprise. The pressure on the zloty has eased recently, limiting the space for speculation on rate cuts. Apart from that, deflation reached a bottom and the growth has been robust, meaning that there are no credible arguments that could change the MPC’s stance. Our baseline assumes a flat policy rate throughout the year. If there is no major deviation from the current expected path of growth and inflation, the MPC will feel comfortable keeping the interest rate stable. Governor Belka said that giving forward guidance on how long the policy rate remains stable would exceed the one-year horizon and the MPC is to end its term earlier. The decision and press conference were neutral for markets and we expect to see the zloty at 4.02 vs EUR at the end of the quarter.

HU Bonds: Templeton Fund Management, one of the biggest foreign investors in the Hungarian bond market, has begun to reduce its exposure to Hungary. Due to the losses realized in Ukraine, Templeton did not renew its maturing HGBs in 1Q15. But even if Templeton continues to reduce its exposure, we do not think it would cause any problems since the economic outlook is favourable and the ECB’s QE could also provide an accommodative environment. In a separate event, the EconMin and the executive director of the MNB told journalists that the banking tax may not be reduced for banks that fail to increase their lending activity. Such conditionality, however, will not comply with the memorandum signed with the EBDR earlier this year which states that the government should reduce the tax levied on the banking sector from 2016 onward and should not create any laws that increase the burden on the financial sector. While it is not crystal clear what the EconMin meant exactly, we are quite certain that the government’s decision not to cut the banking tax unconditionally will be frowned upon by credit rating agencies. We have put our 10Y yield forecast under revision which is currently set at 3.1% for the end of 2Q15.

CZ Macro: In spite of the advantage of one extra working day compared to the same month in the previous year, Czech retail sales growth excluding the sale and repair of motor vehicles moderated to 5.9% y/y in March, from 6.3% y/y in February (market consensus at 6.9% y/y). As for the whole of 1Q15, Czech retail sales advanced 6% y/y, recording the fastest rate of growth since 1Q08, which poses an upward risk to our forecast for a 2.8% increase in private consumption and GDP growth of 2.6% in 2015. As the CZK's depreciation shortly after the retail sales release was rather muted and short-lived, we maintain our EURCZK forecast at 27.50 at the end of 2Q15.

Traders’ Comments:

CEE Fixed income: The sell-off in fixed income continues but the longevity is being debated even as the stampede for the exit accelerates. 6m PLN forward-rate agreements rose above WIBOR for the first time in a year yesterday, indicating that investors are now pricing in a scenario where the NBP is more likely to raise rates in the next half-year. That looks overdone but the recent jump in the oil price seems to have reignited fears that inflation could come back quicker than previously envisioned. Should that indeed happen, then growth and asset prices in major equity markets will likely suffer, putting policy makers in a quandary of their own making.