CEE: Romania’s growth and inflation in focus

This week, another four CEE countries will release their flash GDP growth estimates for 2Q. In Romania, we expect positive q/q growth, which should bring the annual contraction seen in previous quarters to an end. In Poland, we expect economic growth to accelerate to 3.8% y/y in 2Q, up from 3.5% y/y in 1Q. In Slovakia, we also expect GDP growth to accelerate, from 0.9% y/y in 1Q to 1.4% in 2Q. Another set of indicators worth watching will be the detailed July inflation data for Romania, Serbia, Slovakia and Poland. Romania’s inflation reading will be the most closely watched, as we expect it to collapse significantly from 10.4% to 7.8%, with the impact of the electricity price liberalization introduced in July last year dropping out of the statistical base this month. In addition, several CEE countries are set to publish their industrial output and trade balance data for June. Finally, the central banks of Romania and Serbia will hold their MPC meetings this week, at which policy rates are expected to remain unchanged.

FX market developments

CEE currencies weakened slightly last week, as the uncertainty surrounding the situation in the Middle East contributed to higher oil price volatility. At the same time, two central banks sent signals that could disappoint FX investors, as they suggest that the respective currencies may become less attractive for carry trades going forward. The CNB left interest rates unchanged and signaled no urgency for hikes anytime soon. Its new forecast assumes broadly stable rates in the near term, which stands in sharp contrast to earlier market expectations that were pricing in up to three rate hikes within nine months. In Hungary, the minutes from the latest MPC meeting confirmed the central bank’s commitment to continuing monetary easing. Besides the almost fully expected rate cut in August, the very low inflation reading published last Friday, with July inflation coming in at 1.2%, increases the likelihood of an additional rate cut at the September meeting.

Bond market developments

Last week, 10Y government bond yields declined by around 10-20bp w/w across CEE, with Romania being the only exception. Markets were still digesting the last-minute saving of Romania’s investment-grade rating from the previous week and remained cautious ahead of Moody’s decision scheduled for last Friday. The largest declines in yields were seen in Czechia and Hungary, where central bank forecasts and the latest inflation figures eased expectations of tighter monetary policy or constraints to ease, respectively. This week, Romania will reopen ROMGBs maturing in 2035 and 2040, while Czechia will reopen CZGBs maturing in 2035, 2037 and 2038, with the latter being a floating rate bond. Czechia, Hungary and Romania will also offer T-bills. On top of that, Poland and Hungary will conduct their regular bond auctions.

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