Czech Republic

CNB in aggressive easing mode


Hungary

Not only IMF and EU help, but a new banking sector rescue package should calm markets


Poland

The NBP will not fall in line with other European central banks (just yet)...


Slovakia

The National Bank of Slovakia will need to react to the ECB 50bps rate cut


The Week Ahead

Inflation figures expected to show easing price pressures


Overview

While CNB acts aggressively, Hungary awaits IMF help

The Czech National Bank surprised last week. Simply no one had expected the aggressive 75 basis points cut in the official interest rate. Under normal circumstances, a rate cut by 50 basis points more than the market expectation would trigger turbulence in the forex and fixed income markets and lead to a depreciation of the currency and a decline in market interest rates. Although both events happened, the reaction was not at all standard. As far as the koruna is concerned, the fact that central banks in Western Europe, led by the BoE, also cut their base rates on the same day might have saved the koruna from an immediate significant depreciation. Even so, we may still be in for a depreciation of the Czech currency. As regards the impact of the Czech National Bank’s repo rate cut on market interest rates and yields; this has mostly been eliminated by the currently frozen credit channel. Unfortunately, this may also block the transmission of another monetary easing, into the real economy, and thus market interest rates may continue to be high above the CNB’s repo rate.

Another major event important for Central European markets (notably Hungary) was the final approval of the bailout loan package by the IMF, with the immediate release of the first tranche of the credit facility approved. Paradoxically, Hungarian markets (the forint and bonds) did not react at all, and even tended to decline. Furthermore, notwithstanding the bailout approved, another increase in the risk aversion in global markets and rating downgrades in Eastern Europe may lead to more declines, and not only in Hungary but also in the rest of Central Europe.