A sweeping wave of rate hikes

A very busy week ahead awaits us as three regional central banks have their rate-setting meetings scheduled, and a string of monthly indicators will be released across CEE. The Romanian central bank will likely increase its key rate by 75bp to 4.50% on Wednesday. The credit facility rate, which remains the relevant operational policy instrument under tight liquidity management policy, should thus reach 5.50%. On Thursday, the Polish and Serbian central banks will tighten their stances once again. We expect the key rate to be hiked by 50bp to 3% in Serbia, whereas the market foresees a 75bp key rate increase to 6.75% in Poland. Hungary will publish its June inflation print, which very likely accelerated to 11.5% y/y, despite the price caps in place. May industrial production growth is expected in the positive region, between 2.2-2.5% y/y in Hungary and Czechia. Hungary, Romania and Slovakia will release their retail sales prints for May. These are likely to have eased from their previous levels, but should still remain positive. Moreover, May foreign trade balance for Slovakia, Slovenia and Czechia, as well as June PPI prints for Croatia and Serbia will be out.

FX market developments

Global risk-off mood moved the forint and the zloty to weaker levels on Friday, close to 398 and 4.71 vs. EUR, respectively. This erased most of the forint’s gains from mid-last week, attained after the Hungarian central bank delivered a bigger-than-expected key rate hike of 185bp to 7.75% on Tuesday and then increased the one-week deposit rate by 50bp on Thursday, thus merging the two rates. The MNB increased its average inflation forecast and only expects inflation to return to the tolerance band at the end of 2023. The zloty is awaiting this week’s central bank meeting where more tightening should be announced – markets deem a 75bp hike as likely, although Polish MPC member Kotecki thinks the central bank should hike by at least 100bp. The koruna remains anchored close to 24.75 vs. EUR, being propped up also by CNB’s interventions. As the meeting minutes revealed, new Czech central bank Governor Michl stuck to his opposition to brisk rate hikes at the bank’s latest meeting when it raised the key rate by 125bp to 7%. ECB President Lagarde said the bank’s upcoming anti-fragmentation program will curb rising borrowing costs for vulnerable Euro Area countries, while keeping up pressure on governments to mend their fiscal stances. Thus, the new scheme may come with strings attached.

Bond market developments

Last week brought some partial rebound to CEE bond markets, driven by the weakening of economic prospects and collapse of yields on the major markets, in the US in particular (5Y Treasury yield -20bp w/w). In CEE, we could see the POLGB and CZGB yield curves becoming more inverted, with the mid-part moving down 20-25bp w/w and the long end 20-30bp w/w. In both countries, PMIs in manufacturing dropped below 50 in June, pointing to a possible contraction of industrial output in the months ahead. CEE debt agencies unveiled their borrowing plans for July. The Czech MinFin plans to borrow CZK 20bn via T-bonds and CZK 20bn via T-bills in July. That is about 20% lower volume compared to June. Poland will offer only 2-3 regular auctions and 2-3 switch auctions in the entire 3Q, targeting to raise PLN 14-25bn and with auctions taking place mostly in the second half of July. Romania plans to borrow RON 3.8bn on the local market in July. This week, Czechia, Hungary and Romania will offer T-bills and Romania will reopen ROMGB 2034. On top of that, the BGK will offer Covid-relief bonds this week.

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