The pace of the contraction in Lithuanian industrial production moderated in July, dropping 15.7% y/y, versus -16.3% in June.
On Friday the Lithuanian Prime Minister Andrius Kubilius said in the interview for CNBC that the worst of the recession is behind them and the biggest problem for Lithuania is public finances, though Lithuania is able to finance its deficit through capital markets and therefore does not envisage asking the IMF or EU for help. When asked about a possible devaluation, PM Kubilius said a devaluation is not on the agenda and he furthermore expects Lithuania to meet the Maastricht criteria for euro entry by summer 2012.
Preview
The Hungarian rate decision is the key event today. We expect a 50bp cut, which should bring the Hungarian base rate down to 8.00%. This is also the consensus expectation.
Trading update
Even though the CEE currencies entered Friday weaker, a strong reading for the Euroland PMI published Friday morning renewed risk appetite and the CEE currencies gained ground with the Polish zloty (PLN) gaining the most and the CZK moving to its 2009 highs.
Last week the swap rates dropped in most EMEA countries. Especially in Hungary and Turkey a strong rally has occurred on the back of increased risk appetite and increased expectations about further cuts from these two countries’ central banks. Hence Hungarian swap rates are down 30bps across the curve ahead of the Monetary Policy Council (MPC) meeting. Although we go with the consensus for 50bp, we note that MNB surprised when they cut by a whooping 100bp at the last meeting. We are not looking for a repeat of this today, as the Hungarian currency has been less stable recently. However there is some risk of a possible 100bp cut.
