CEE: Inflation easing in the region

On the radar

• Producer prices in Serbia grew by 7.4% y/y in June.
• Today, Polish and Romanian central banks will announce interest rate decisions. Stability of rates expected.
• Hungarian central bank will release minutes. Hungary will also show year-to-date budget balance.
• Slovakia will publish trade balance in May in the morning.

Economic developments

June inflation data were released in all CEE countries except Romania. The conflict in the Middle East and the increase in commodity prices added roughly 1 percentage point to headline inflation between March and May. Inflation peaked in April or May across the region. The subsequent de-escalation of the conflict led to a visible decline in oil prices (with Brent crude falling back towards USD 70 per barrel) since mid-June, easing inflationary pressures. It therefore comes as no surprise that inflation declined in June. In Czechia and Hungary, June inflation fell below 2%, while in Poland it reached the central bank's 2.5% target. In Croatia, Slovenia, and Slovakia, headline inflation remains at more elevated levels. In Romania, June inflation data will be published at the beginning of next week, but we expect year-end inflation to reach 5.9% y/y. A sharp deceleration is anticipated due to favorable base effects. Global developments suggest additional short-term relief. On the other hand, depreciation of the Romanian leu remains an upside risk to the inflation outlook. In Serbia, government suggests that June inflation slowed toward 2.7% y/y. All in all, inflationary pressures should ease in the coming months. However, the downward trend may be disrupted by the expiration of government support measures and price caps in several CEE countries. Looking at the risks, extreme weather conditions and high temperatures could affect crops and agricultural prices, although it is still too early to assess the magnitude of the impact.

Market movements

The central banks of Romania and Poland will announce their policy rate decisions today. We expect no change in key interest rates following the meetings. In Poland, the National Bank of Poland will also present its updated inflation and growth projections. It remains to be seen to what extent recent developments in commodity markets will be incorporated into the forecasts. The cut-off date for the projections may have preceded the recent decline in commodity prices, in which case the inflation forecast could be skewed to the upside. Recently, the National Bank of Poland has begun to send more dovish signals. For now, stable interest rates throughout this year and next remain our baseline scenario. In Romania, we expect the monetary easing cycle to begin in the first half of 2027, once inflation declines more substantially. CEE currencies have weakened this week against the euro as US carried out attacks in Iran. In Czechia, lower than expected inflation in June could support depreciation additionally. Moreover, Croatia issued EUR 1.25bn, 5Y tenor - priced at 3.08% (NIP approx. 5bps), book size EUR 1.5bn. EUR 400mn goes to refinancing of maturing bond, rest will be used to meet the budget gap financing needs. Ministry of Finance went quite aggressive in terms of size; this brings issuance to 80% of the FY bond issuance target. No Eurobonds expected this year; another local issue scheduled for 4q when EUR 1.65bn matures.

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