NBH should stay on hold

Headlines

Currencies: Hungary plans expenditure cuts and VAT hike
Fixed Income: NBH should stay on hold

Hungary

The PM announcement about the austerity package did not help the Hungarian forint which slipped some 2% from 292 to 298 on Friday. The package is in line with earlier information from the press and targets 3% of GDP expenditure cut in 2009- 2010 by scrapping the 13th month pension and 13th month bonus in the public sector, cutting subsidies on housing and gas prices and tightening family benefits.

The government also revised the recession forecast to 6% from 3-3.5% and fiscal tightening bears the risk of an even deeper recession. The government is trying to keep the 3% of GDP deficit target for 2009, but said that it will talk to the IMF/EU team about alternative scenarios.

The government also plans to increase the VAT rate from 20% to 25% as of July 1 and to introduce a smaller, 18% rate on common goods like bread, milk and retail gas. Overall, the market has reacted negatively to these announcements. The VAT hike will temporarily boost inflation from 3% to 7% and lower real interest rate, which may keep the currency under pressure. The central bank may also have some comments about the new situation, which we may see after today’s meeting. The consensus and we too, expect an unchanged base rate, but the inflation threat may come into the picture now and this could warrant higher rates in the next months.

The Hungarian bond market also weakened with the currency and yields rising about 30bps and got close to the 11% level. The 5y5y forward spread widened to 320bps and the FRA market priced back a 50bp hike with a small, 20% probability.

Poland

The Polish zloty stayed close around EUR/PLN 4.30 level on Friday. The higher than expected wage growth (5.7% Y/Y) should be another reason for the central bankers to stay on hold in the upcoming meeting. And that opinion is also strongly supported by hawkish MPC member Marian Noga, who thinks that relatively strong wage data point to 2% growth in 2009. On the other hand, still many moderate voters remain cautious. “As long as there are no signs of economic recovery in eurozone, the Polish central bank stays in a monetary easing cycle” says Piotr Kalisz. From our point of view the industrial production figures (scheduled for today) should be of crucial importance for many swing voters on the board. If it comes out slightly above consensus, we believe the board should take a pause for at least one meeting.

The zloty also failed to appreciate on the PM’s comments on euro adoption on Friday. Donald Tusk reaffirmed that Poland could join euro in2012. The start to this week could be slightly optimistic although further development should be global-equities dependent. If the industrial output comes out slightly better, it could be further supportive for the Polish zloty.

Czech Republic

The Czech koruna continued to move sideways on Friday. The only new information for markets was a quote form CNB Governor Tuma, who said the Czech Republic does not need funding from the IMF and that he sees no reason to establish a precautionary facility with the body as Poland and Mexico for instance. This newq was hardly surprising for the market.

Today, the koruna will definitely watch the zloty and particularly the forint as the MNB rate decision is on the agenda. We believe the Czech currency works now as a funding for carry trades in the region, so should the forint and zloty lose some ground, the koruna might outperform its regional peers and vice versa.

Interestingly, the opposition leader Paroubek said that he now looks at the issue of adopting the euro differently from the way he did nine months ago. Until now, ČSSD (Social democrats) had pushed for adopting the euro as quickly as possible. Paroubek acknowledged that the EU’s tough criteria are a disadvantage at a time of crisis. ČSSD wants to base its election campaign on higher government spending.

The Czech yield curve flattened slightly as the market easily absorbed comments from CNB Governor Tuma, who said that the CNB has ample room to manoeuvre and that there's "room on both sides". We believe that the CNB repo rate will stay unchanged after the next meeting in May. Today, the domestic calendar is empty so negative sentiment for the long end of the curve will remain in place as Finance Minister Miroslav Kalousek reminded to investors that the budget deficit can be kept this year to Kč 150bn, which would more bond suply. We do think so as we expect the gap will be wider or around CZK 160 bn (4.3% of GDP).

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