Czech Republic
The Ministry of Finance downgrades the outlook for the Czech economy
Hungary
NBH surprises with a bold 100 bps rate cut
Poland
Poland to see better times
The week ahead
A cut in Hungary, no change in Poland
Overview
Strong FX encourages the NBH and CNB to cut again
The global stock rally continues and is having a beneficial effect on Central European currencies and partly also on bonds. The Czech koruna consequently finds itself at this year’s highs, while the zloty and the forint are not far off of their highs, as are, for example, the prices of Hungarian bonds.
Positive sentiment in the Central European region helped all the countries sell their government bonds at relatively favourable financing levels. On top of that, the strengthening currencies are contributing to the improvement of their respective inflation outlooks, which may be particularly important for Hungary and the Czech Republic. These countries, unlike Poland, have seen no evident signs of a nascent recovery thus far.
A meeting of the NBH Monetary Council was scheduled for this Monday. The NBH was expected to cut the relatively high base interest rate. This happened in spite of the fact that inflation will rise well above the inflation target of the NBH in the second half of the year, due to an increased VAT rate. However, the Council doesn’t need to be concerned about this administratively triggered inflation rise, particularly as the economy is still in a deep depression, the domestic currency is strengthening, and the conditions for funding public budgets have improved greatly. Hence the Council has happily embraced the opportunity to cut its rates, which offer one of the highest yields in the region.
The Czech National Bank, by contrast, finds itself in a completely different position. The Czech official interest rates are the lowest of the Eastern Bloc countries. Yet, the local currency is also improving the inflation outlook of the Czech Republic, thus putting pressure on CNB to cut rates again. Within the next few days, they will have a chance to indicate markets whether they will really go over to a rate cut on August 6.
