CEE Macroeconomic and Fixed Income Research

Analysts’ View:

PL Rates: We expect to see at least a 25 bp cut in Poland at today’s rate decision meeting (our baseline scenario), while a bigger than expected move, i.e. a 50 bp cut, would be a surprise, albeit a positive one, in our view. We believe that the motion for a rate cut will find a majority due to ongoing deflation (the new inflation projection should only confirm that deflation will continue for longer in Poland), as it seems that this has again become the main concern. Today’s decision (if the central bank really cuts the rate) should stop the recent appreciating trend in the PLN for a while, especially if our baseline scenario materializes and is supported by a statement that the door for further easing is still open. Currently, we see EURPLN close to 4.18 at the end of 1Q15 but there is considerable risk for a stronger zloty as the interest rate differential between Poland and Eurozone remains attractive in the face of the upcoming QE.

TR Rates: Annual CPI rose to 7.55% in February from 7.2% in January, but the annual core-I inflation dropped visibly to 7.7% from the previous month’s 8.6%. On the negative side, annual services inflation remained elevated at around 9%, signaling a warning for observors of pricing behaviour. Inflation is likely to decline back towards 7% in March and we continue to forecast 6.2% for the year-end. The CBT may continue cutting rates in March. Our base case remains a 25 bp rate cut for the remainder of the year. However, reducing the policy rate from the current 7.5% to slightly above inflation, would leave room for a 100-150 bp cut. This would be too extreme, especially if the Fed starts hiking in June, but it also suggests that the risks to our estimate are geared to the dovish side. We think interest rate policy will continue weighing on the TRY and forecast a USDTRY of 2.59 by year end.

RO Macro: In seasonally-adjusted terms, retail sales increased 1.6% m/m in January, thanks to record-high levels of consumer confidence. Looking at the details, food products continued to gain momentum, fuels showed only a modest advance, while non-food products remained in negative territory. For the time being, the retail sales data supports our view that household consumption will remain the key driver behind GDP growth in 2015. Our fullyear GDP growth forecast for this year is 2.2% and we expect little movement in either 5y ROMGBs (we forecast a flat yield of 2.3% over the course of the year) or EURRON (we forecast a flat rate of EURRON 4.48 over the course of the year)

Traders’ Comments:

CEE Fixed income: CEE local currency government bonds succumbed to upward pressure on yields across the board as investors await the initiation of QE in the Eurozone. Turnover is low. The picture was slightly different in Eurobonds where yields drifted lower but turnover is light here as well. The Croatian Roadshow is in full swing and the sovereigns Eurobonds are well bid ahead of the new offering. In the CEE cash corporate space, prices were steady and flow was small whilst buyers dominated in Austrian financial sub debt. Some tremors from the Heta debt moratorium are still making themselves felt though. Pfandbriefbank oesterreich, which sells bonds on behalf of Austrian regional banks, has warned that it could become insolvent on EUR 5.6 bn of its bonds if it does not receive EUR 670 m of additional capital from its member banks. The government is attempting to convince creditors in the HypoAlpeAdria bad bank to accept voluntary losses as it winds down Heta, in the hope that the province of Corinthia would then be off the hook for up to EUR 10.2 bn of guarantees (Corinthia has annual tax revenues of EUR 2.5 bn) but will likely face o flood of court cases as investors sue Austria and Corinthia. The guarantees would be triggered if Heta enters insolvency which has been averted for 15 months while the regulator, the FMA, drafts a resolution plan. In spite of all the negative news, Austria still managed to issue EUR 550 m in a 5y RAGB at a negative yield yesterday. Such is the power of QE.