CEE Macroeconomic and Fixed Income Research

Analysts’ View:

PL Rates: It is broadly expected that the MPC will leave the policy rate flat at 1.5%; stability of rates is our baseline scenario not only for this meeting, but until the end of the year. As the recent appreciation pressure on the zloty has eased, there is less and less space left for speculation on rate cuts. In particular, deflation reached a bottom and economic growth remains robust. We think that the MPC will reiterate that it feels comfortable with the latest decision to cut the key rate to a historic low of 1.5% and end the easing cycle, justifying this with the fact that the recent development is in line with expectations and the MPC sees no threats that could change its stance. As there is little room for a surprise, we expect a limited market reaction to the announcement of the decision as well as the press conference. We currently see the zloty at 4.02 vs. the EUR at the end of the quarter.

RO Rates: Central bank is expected to announce its monetary policy rate decision later today. We see the National Bank keeping the key rate flat at 2%, but do not rule out a cut in mandatory reserves to 8% (from 10% at present). Inflation easing into the negative territory in the second half of this year – following the VAT slash on all food products to 9% – will most likely be seen as ‘transitory’ by the central bank. We so far maintain our call for 5-year ROGB yields at 2.3% throughout the remainder of this year.

HU Rates: The forint jumped on the roller-coaster yesterday, as the EURHUF (in-line with swings in international sentiment) first declined by around 0.8%, only to reverse this move completely in the afternoon. So far this year, the forint was on an appreciating path which triggered explicit statements from central bank officials that a strong HUF may hinder their progress achieving the medium-term inflation target (we believe levels below 300 make the MPC uncomfortable). Another comment from an MPC member on Tuesday fits this trend of communication: according to Mr Kandrács, financial markets got the message that the rate cutting cycle will continue as long as it is needed. We forecast the key rate (currently at 1.8%) to be cut to 1.5% in two respective 15 bp steps by the end of June. Risks are tilted to the downside as we see room for further cuts from July onwards if the forint manages to firm against the euro. Our forecast projects HGB yields in the 10 year tenor to drop to 3.1% by end-2Q15. However, we put the forecast on review as we now envisage upside risks to the yield’s trajectory.

Traders’ Comments:

CEE Fixed income: The continued sell-off in the Bund is now being put down to the rise in the oil price which topped USD 68 (North Sea Brent) but it’s really anyone’s guess as to what is really going on. Only recently, it was supposed to have been because of the increased chances of an agreement between Greece and its creditors but that speculation was firmly put to bed yesterday as Greek assets sold off heavily at the same time as the Bund. Technicals are obviously playing an important role in fixed income markets which have been strongly distorted by monetary policy but those who believed that QE would lead to a cap on yields via ECB purchases may have overseen the fact that QE can only be deemed a success by policymakers if yields rise. The knock-on effect to CEE can be seen with an increase in yields across all markets and volatility in the FX markets. It should be noted that it is the most liquid CEE bond market that has displayed some of the biggest moves in yields. Yields on POLGBs rose substantially day to day as the curve continued its steepening trend, something we see in all major CEE sovereign bond markets. Longer duration bonds is apparently not the place to be at the moment.