CEE Macroeconomic and Fixed Income Research

Analysts’ views:

HU Rates: Yesterday, the MNB carried out a larger than expected rate easing, as the bank lowered the key rate by 15 bps vs. the market consensus of 10 bps. The 2.7% policy rate can be reduced further in our view, as the MPC can continue to cite the still very low headline CPI figure. That said, the statement released after the cut indicated that the MNB will decide on the necessity and possibility of further rate easing after the new economic projections of the bank which will become available in March. For the time being, we stick to our EURHUF forecast of 302 for the end of this year.

TR Rates: As it was widely expected, the CBT left interest rates unchanged yesterday. The one-week repo rate remains at 10%, the ON lending rate is at 12% and the ON borrowing rate was also left at 8%. The CBT reiterated, however, that it will remain in tightening mode until the inflation outlook improves. Although there is no need for an immediate rate hike in our view, potential renewed pressure on the currency could, at some point, prompt more tightening. The CBT will hold a meeting today in Ankara where the bank may provide further insight into its liquidity management plans. We stick to our USDTRY forecast of 2.25 for the end of 2014.

PL Macro: Wages grew 3.4% y/y, but employment stagnated in January, which might have disappointed the market. Today's data, however, are of more importance as industrial output will be released. We expect to see a growth rate of around 3.5% y/y, confirming further expansion of production. Any positive surprise may support the recent appreciation of the zloty which we currently see at 4.15 vs EUR at the end of 1Q14.

Traders’ Comments:

CEE Fixed Income: If it was the intention of the MNB to ease monetary policy yesterday by cutting key rates more than expected, then they may have to rethink their methods. Yields on HGBs shot up following the rate announcement. The Economy Minister has obviously become exasperated with the MNB’s recent approach of benign neglect toward the currency and sent a letter of complaint to the Governor of the central bank. It is widely believed that the MNB intervened in the FX market at the end of last year to push the Forint toward the Government’s target in oder to show a drop in the value of FX debt to GDP. Parliament approved the 2014 budget with an assumption that EURHUF would not exceed 296.90. The CZK appreciated following another political debate in CEE about central banks and intervention in the FX markets. This time it was President Zemen who lamented the CNB intervention in FX markets, giving a boost to CZK bulls. Yields on short dated CZGBs rose around 4 bps. The Austrian Governments willingness to contemplate the insolvency of HypoAlpeAdria has forced Moodys to rethink the sanctity of government guarantees, resulting in a ratings downgrade for four Austrian banking groups that benefit from a statutory deficiency guarantee issued by Austrian federal states or municipalities. Moody's has lowered the ratings of the guaranteed long-term senior unsecured and subordinated debt instruments of Hypo Tirol Bank AG, Vorarlberger Landes- und Hypothekenbank AG and UniCredit Bank Austria AG. The ratings agency also placed on review for downgrade the long-term Aaa backed senior unsecured debt ratings of Pfandbriefstelle der Oesterreichischen Landes-Hypothekenbanken (Pfandbriefstelle). “The rated debt obligations of Pfandbriefstelle are grandfathered (under statutory deficiency guarantees) by its member banks - Landeshypothekenbanken (regional commercial and mortgage banks) - and those banks' guarantors, the respective Austrian federal states (Bundesländer), according to Austrian federal law”, Moodys wrote in a report on its website. It’s fair to say that politics are really muddying the waters for investors. Who knows what will happen next in the Ukraine but press headlines are increasingly using the term “civil war”? Turnover is, unsurprisingly, very, very low in CEE bond markets at the moment.