CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

HU Rates: The central bank surprised yesterday with a 20 bp rate cut to 2.1%, more than the expectation of a 10 bp reduction, and also announced that the rate cutting cycle is now over. The Governor (who is very rarely giving speeches) gave an extraordinary press conference after the decision and told the press that the MPC wants to maintain the low interest rate environment for as long as possible. The HUF fell immediately after the decision, but soon reversed losses as it became evident that the easing cycle that started in August 2012 will be terminated. Our forecast for the bottom of the cycle was 2.0%, but for the time being, we keep our market forecasts unchanged. As for the policy rate, we think that the likely rate increases by the Fed in 2H15 will make tightening in Hungary also unavoidable next year. The policy rate could climb back to 3% at the end of 2015. As for the EURHUF, we see it hovering around 307 at the end of this year.

RO Rates: With inflation hovering at historically low levels and prospects of an economic slowdown amid persistently sluggish lending, everything points to further monetary policy easing through rate cuts. Inflation hit another all-time low in June when it fell to 0.7% y/y, while adjusted CORE2 – the preferred gauge of the central bank – was struggling in negative territory for the ninth consecutive month. In the meantime, domestic demand has not yet fully recovered: investments have continuously delivered a negative contribution to annual GDP in the last six quarters, and while private consumption looks better, evidence of a further rebound is needed, especially after a lean year like 2013 (positive base effect). We now expect the central bank to slash the key rate by another 25 bps to 3.25% in 3Q14 and see year-end inflation rising to only 2.4% (vs. our previous expectation of 3%). Our FX and bond yield forecasts remain unchanged.

Traders’ Comments:

CEE Fixed Income: CPI was moderate in June and along with the strength in housing this combines to create a picture of a goldilocks economy in the US. EU politicians also failed to follow up tough talk with strong action against Russia. The combination was positive for risk-takers and currencies in our region got a boost as global equities benefited from the relief trade. Even the MICEX rose 1.6%, snapping 6 days of losses. The jump in the HUF is being ascribed to an end in the rate-cutting cycle in Hungary but the jump in the TRY is being linked to a reinvigoration of rate cuts. So what’s the real story? Should, as seems inevitable, Argentina default, or, lo and behold, Chinese engineering and construction services provider Huatong fail to make its debt payments or the EU slap harsher sanctions on Russia tomorrow and CEE FX continue to rally then we would have to give much more credence to the speculation that investors are reallocating strongly away from other emerging markets, especially the BRICs, to CEE. The combination of global markets awash with excess liquidity and a reallocation of investor funds hunting for yield toward our region is positive for the carry trade and a driving factor behind a further bull flattening of yield curves.