CEE: Czechia on hold, Moody’s to review Poland

There are two events in the region worth special attention. Czechia’s central bank meeting is scheduled for Thursday, and we expect it to remain on hold at the September meeting. Although there is growing concern about the inflation development and underlying demand pressure, it seems that Czechia’s central bank is not there just yet to raise the policy rate. Another important event is the review of the rating and outlook of Poland by Moody’s on Friday after the market closes. On one hand, Poland has a negative outlook, but the fiscal plan does not suggest a widening of the budget gap next year. On the other hand, the risks of a downgrade have been rising for Poland, given the debt trajectory. On top of that, Moody’s rating of Poland is one notch higher than those of Fitch Ratings and S&P. While we acknowledge the risks, we believe that Moody’s will not change its rating of Poland. Other than that, industrial output will be released for Romania (July) and Poland (August). The inflation structure in August will be presented in Croatia, Poland and Slovakia, while Czechia will show producer price growth. Finally, current account data will be published in Poland (alongside the trade balance and export and import growth), Romania, Serbia and Slovakia.

FX market developments

CEE currencies have weakened against the euro over the last week. The EUHUF moved up the most and touched 364 on Friday, while the Polish zloty and Czech koruna were less sensitive to global developments. First, a global bond sell-off driven by the oil price development pushed the 10-year yield to 4.94% ahead of Fed meeting. Second, the ECB Governing Council raised key interest rates by 25bp, lifting the deposit rate to 2.5%. The conflict in the Middle East continues to fuel inflation pressure, and inflation is likely to remain above-target for an extended period, raising the risks of further monetary tightening. In the region, we had two central bank meetings. While interest rates remained stable in Poland and Serbia, the Middle East conflict and rising prices of oil have brought inflation fears to the front, making the central banks more cautious in their statements. This week, Czechia’s central bank is holding a rate setting meeting. Czechia has so far been the only country in the region to react to the rising inflationary pressure. We believe that the central bank will remain on hold this time, but expectations for another rate hike have been rising in Czechia.

Bond market developments

Government bond yields continued to climb last week, driven by higher oil prices and growing expectations that energy costs may remain elevated for longer, thereby posing a more persistent inflation risk. In the Euro Area, 10Y sovereign yields rose by around 20bp w/w, with a similar increase recorded in Hungary and Poland. The move in Czechia was more moderate, as yields had already risen significantly earlier, reflecting the CNB’s earlier tightening cycle and already aggressive market pricing of further rate hikes. By contrast, Hungarian markets had only recently dropped the pricing of additional rate cuts, while in Poland FRA 9x12 contracts are now pricing in roughly three rate hikes, having increased by nearly 100bp over the past two months. Against the backdrop of the adverse performance at the long end of yield curves, sovereign issuance is expected to concentrate on shorter maturities, with T-bills scheduled in Croatia, Hungary and Romania, while the Czech Republic will offer a floater next to its coupon bond.

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