All eyes on the Hungarian central bank move
|This week in CEE
Inflation and monetary policy will be in the limelight this week, as we await a flood of CPI prints and the Hungarian central bank decision. Another 30bp increase of the policy rate to 2.4% is the most probable at Tuesday’s MNB meeting, however, the Hungarian central bank may adjust the policy rate closer to the 1-week depo rate which would indicate a bigger step. The review of the QE program, which is expected to be gradually phased out soon, as well as publication of economic and inflation forecasts, are also scheduled. Consumer price growth likely accelerated further across the region in November. Fuel and food prices continue to play a visible role, combined with several local factors. Croatian CPI print is anticipated to have sped up to 4.2% y/y and the Slovak one to 5.4% y/y. Serbian inflation likely went up to 7.1% y/y, whereas Romanian CPI growth is expected at just over 8% year on- year. Romanian gas bills were not impacted by the price cap and subsidies in November, but the impact should be visible in December. Polish flash inflation reading of 7.7% y/y should be confirmed, with core inflation accelerating to 4.7% y/y last month. Moreover, inflationary pressures remain elevated also in production – we expect Czech producer price growth to have peaked at 13.3% y/y in November. Moreover, October industrial production in Romania likely fell by 6.6% y/y, on the back of supply-side issues. We will also see the first November real economy data for Poland. Both employment and wage growth likely remained solid, at 0.5% y/y and 8.5% y/y, respectively.
FX market developments
The preceding week was calm on the CEE FX market as the currencies were broadly unchanged. The Hungarian central bank delivered its fifth rate hike in a month as it raised the one-week deposit rate by 20bp to 3.3%. Despite the delivered increase and Deputy Governor Virag reiterating the MNB’s pledge to further rate hikes, the Hungarian forint marginally weakened toward 365 vs. the EUR. This week, all eyes will still be on the MNB as the central bank is to hold a regular rate-setting meeting. Given last week’s increase of the one-week depo rate, we expect the MNB to raise the key rate by 30bp to 2.4% and follow with the same increase of the deposit rate later this week. Elsewhere, the National Bank of Poland raised the target rate by 50bp to 1.75%, bringing it above the pre-pandemic level. The statement released after the decision suggests that the central bank will continue raising rates, but the pace of tightening might be slower than we currently expect. Governor Glapinski sees space for further rate hike(s), but in his view, the NBP ‘has already raised rates quite significantly’. The decision left markets somewhat unsatisfied as a more aggressive increase has been priced in, resulting in the weakening of the PLN toward 4.62 vs. the EUR. The EURCZK trades in the range 25.4-25.50, while the National Bank of Romania keeps a tight grip on the exchange rate as the EUR RON remains anchored at 4.95. We expect some weakening of the leu at the end of the year to 4.98 vs. the EUR.
Bond market developments
CEE government bond markets finally saw some correction; yields declined and spreads (also on Eurobonds) narrowed last week. The most visible move happened on the HGB yield curve, where the 10Y yield fell 25bp w/w and the curve continued to flatten around 4-4.20%. It seems that the reduction of government bond purchases is not harming HGBs too much, as it adds credibility to the recent tightening, which may help to anchor inflation expectations and thus keep rates at a less elevated level in the mid-run. We expect flattening or even an inversion of yield curves to take place in the coming quarters in all countries in which central banks have taken bold steps towards fighting inflation. This week, Czechia will reopen CZGBs 2027, 2029, 2033, Romania ROMGBs 2027, 2031, 2036, and Serbia SERBG 2025. On top of that, Czechia, Hungary and Romania will issue T-bills. On Friday, Moody’s is supposed to issue its review of Slovakia’s sovereign rating, which currently stands at ‘A2’ with a stable outlook.
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