The CNB cuts its repo rate to all-time low at 1.50 % level

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Currencies: EUR/HUF dips briefly to 275 area
Fixed Income: The CNB cuts its repo rate to all-time low at 1.50 % level

Hungary

The Hungarian forint stabilized on Friday between 276 and 278. Ruling Socialists lost the municipal election of the Southern city Pecs with a wide margin and this political defeat could have some repercussions on domestic politics. The Parliament will vote about tax proposals today. This will be the second part of the Bajnai package and contains the VAT hike to 25% and the 5pp lower social contribution rate paid by the employer. Higher inflation in the second half could require a more hawkish central bank policy in order to minimize the risk of second round effects, which would help the currency, as well. In the short-run however a correction seems likely after last week’s rally and this may push the currency to around 285/€.

The Hungarian bond market finished the week in a positive tone and yields lowered to below 10% across the curve. The market has been following the currency in general, so the outlook is pretty similar to that.

Czech Republic

The Czech market was closed on Friday, but the key event happened already on Thursday. Beside an expected ECB rate cut, the Czech National Bank delivered its interest rate reduction too. The CNB cut its base rate by 25 bps to a record level of 1.50%. Five Board members voted for the repo rate reduction, while the remaining two wanted the rate to stay unchanged. As CNB governor Tuma explained the main reason for the cut had been continuing weakness of the Czech economy. In this respect, the CNB downgraded its GDP outlook and now calls for a 2.4 % drop this year. In our view, this forecast is quite pessimistic, so we actually agree with governor latter comments that the worst period for the economy could be actually over. So we tend to agree that the 1.50% is a bottom for the Czech repo rate, but it seems that the Bank Board watch GDP and industrial figures more closely than we thought so there is a risk that any further decline in economic activity might lead to another dovish action.

All in all, Thursday’s CNB action will definitely lead to further steepening of the Czech yield curve. This process had already been observed after the Bank decision, but might continue further unless the koruna eases significantly.

The Czech koruna stayed in very tight range 26.60-26.80 at the end of the week as the local traders were out on holiday. The positive effect of record trade balance surplus has slowly vanished and the pair was trading weaker in compare with Thursday. Also the late Thursday outcome of CNB meeting could have played slightly negative role as another interest rate cut surprised part of the market including us. The start of the week should depend on further development of risk aversion on the global equity markets. Later this week, he GDP figures should come to focus. This time the lagging GDP could be a market mover as there are high differences within consensus and the first quarter outcome sets the important starting level for the whole year.

Poland

The Polish zloty was slightly stronger at the end of the week. It received some support from the finance ministry that did not rule out exchanging EU funds on the FX market to defend the zloty. Nevertheless the pair was tired to get further on Friday, which may be the same case during this week. The zloty might look at the developments in risky assets; but besides that, the Wednesday inflation figures should be in focus. After surprisingly high outcome of March figure, the investors should be interested in whether the food driven pressures in consumer basket persist. The inflation development is one of the key factors of timing of the next interest rate cut in Poland and hence should be interesting for the zloty as well.

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