CEE: Czechia leaning toward rate hike

This week on global markets, the FOMC meeting will attract all the attention alongside developments in the Middle East and a possible peace deal. In the region, the Czech central bank is a key event, especially as expectations are shifting toward a rate hike. The ECB seems to have set the tone by raising interest rates last week. Other than the central bank meeting, we will see inflation details in Slovakia, Poland and Croatia on Monday. As far as price development is concerned, Czechia and Slovenia will show producer price growth. Romania and Poland will publish industrial output growth while Serbia and Slovakia have current account data scheduled for release. Finally, Slovakia is expected to release its unemployment rate. On Friday after market close, Moody’s is scheduled to review Slovakia’s rating and outlook.

FX market developments

At the end of the week, we have seen CEE currencies strengthening and we believe global developments are in play. President Trump’s announcement of a peace deal with Iran and the reopening of the Strait of Hormuz have improved risk sentiment. All three pairs, the EURCZK, EURHUF and EURPLN, moved lower on Friday. The Brent oil price declined below USD 90 per barrel for the first time since the beginning of March. This week, global events will be driving the FX market in the region. Not only the resolution of the Middle East conflict, but also the FOMC meeting will be closely monitored. In the region, the Czech central bank is going to decide on the key interest rate. Despite the inflation decline in May, strong wage growth could be a game changer in the eyes of the central bank’s board. Expectations are moving toward a rate hike more visibly, but the situation remains uncertain, as there are arguments on both sides - raising interest rates and keeping them stable. It is likely to be a close call.

Bond market developments

Long-term yields have declined across the region, most profoundly in Hungary and Poland (10Y yields lower by 20bp), where interest rate cuts are being priced in. Such a move is also driven by global developments, as hopes for a resolution to the Middle East conflict will be stabilizing for the markets. As far as the political scene is concerned, Romania’s President Dan urged parties to prioritize national interest over electoral calculations and warned of a sharp economic downturn risk, but the National Liberal Party (PNL) has decided not to support the investiture of the government to be proposed by PM-designate Eugen Tomac. President Nicusor Dan designated Adrian Vestea to form a new government, but a nomination doesn't have the backing of the junior Liberal Party. The political uncertainty remains elevated with high stakes in the absence of a functioning government. Further, Serbia’s President Aleksandar Vucic said he may step down before his second and final mandate expires next year and possibly retake the post of prime minister following early elections expected in the fall. Finally, Hungary’s YTD cash-flow budget deficit reached 90% of the full-year target in May. Hungary will need to address fiscal challenges in a short period of time and markets are waiting for the budget amendment for 2026 and plans beyond this year.

Download The Full CEE Insights