CEE: Hungary to pause the easing cycle

This week, there is another central bank meeting in the region. Hungary will decide on its key policy rate on Tuesday, and we expect a pause in the easing cycle. Other than that, Poland will continue to show the performance of its economy in August. After slightly weaker industrial production growth, we expect retail sales to remain solid. The unemployment rate will be published in Croatia, Poland and Hungary and wage growth is due in Croatia, Poland and Serbia. Apart from labor market data in these listed countries, producer prices will be released in Slovenia and the current account balance in Hungary. On Friday, after the market closes, S&P will publish its review of Czechia and Slovenia’s ratings and outlooks.

FX market developments

CEE currencies have been under a global influence over the last week. The Fed decided to increase interest rates by 25 basis points and, in response, the EURUSD moved visibly down toward 1.14, affecting local FX markets to a great extent. The EURPLN touched 4.36, but went lower at the end of the week. In Czechia, the central bank kept the policy rate unchanged, but another hike should be expected by the end of the year. Geopolitical tensions and elevated commodity prices (Brent above USD 100 per barrel) are among the reasons. Meanwhile, the Hungarian central bank will pause at the upcoming meeting after a short easing cycle that brought the interest rate down to 5.50% in Hungary. In Poland, the risks for interest rate hikes keep rising as long as commodity prices remain high. Polish central banker Dabrowski stated in an interview that interest rate stabilization until the end of 1Q27 remains the most likely scenario. In the central bank's view, there are currently no grounds for pre-emptive monetary tightening. Another central banker, Kotecki, conditions monetary tightening on inflation moving beyond 4%.

Bond market developments

10Y government bond yields edged lower across global markets following last week's Fed decision to fight inflation through higher interest rates while signaling the possibility of an additional rate hike. A correction in oil prices also provided some support to fixed income markets toward the end of the week, although current oil price levels remain inflationary and continue to pose upside risks to the inflation outlook. The CEE bond market performance was mixed. The most interesting development occurred in Poland, where 10Y government bonds rallied strongly, pushing yields around 30bp lower w/w. This may have been driven by the very steep yield curve, with the 10Y-2Y spread having risen above 160bp last week, the highest level in five years. Such valuations may finally have become sufficiently attractive for local investors to increase duration exposure. On the primary market, Slovakia will reopen four government bonds this week, including a 16Y benchmark. The Slovak Debt Agency has already completed around 70% of its planned gross issuance for the year. Czechia will also offer longer-dated paper through a 17Y floating-rate bond alongside a 9Y fixed-coupon bond. In Romania, the MinFin will reopen the 2029 and 2035 ROMGBs. It will be interesting to see how investors assess the likelihood of the current political deadlock being resolved through the nomination of Muresan as PM, or whether the president will need to pursue an alternative solution.

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