Central bank meetings in focus

The first week of August will put two regional central banks into the limelight. The Czech central bank meeting on Thursday should bring a 25bp rate hike, lifting the key rate up to 0.75%, as justified by the inflation outlook, as well as improved pandemic situation. After that, we expect that one more hike may materialize in the rest of the year, which is a more cautious approach compared to the currently more optimistic CNB rhetoric. Romanian central bank will meet on Friday and is likely to keep its key rate at 1.25%. The subsequent press release is unlikely to include any outright commitment to consistent tight liquidity management, which may remain rather a function of FX weakening pressures. Moreover, Romania, Hungary, Czechia and Slovakia will publish their June retail sales prints which are likely to be somewhat milder than before, courtesy of the waning base effect. Nonetheless, favorable economic development and lifted restrictions should have supported retail trade, which may have reached a growth pace of 2.5% y/y in Hungary and as much as 16.4% y/y in Romania. June industrial production was still affected by the lower base from last year to some extent. Thus, we may expect double-digit year-on-year dynamics in Czechia (11.4% y/y) and Hungary (17.5% y/y). However, supply-side constraints likely affected the monthly development of industry.

FX market developments

Fed Chair Powell's comments and the somewhat weaker than expected 2Q21 GDP growth affected the US dollar, which depreciated and moved toward 1.19 vs. the EUR. While the FOMC kept interest rates unchanged and maintained asset purchases at USD 120bn a month, Chairman Powell said that there was still some way to go to meet the conditions for tapering. The weaker US dollar supported CEE currencies, which appreciated across the board. Although the Hungarian central bank delivered a higher than expected interest rate hike (30bp vs. the expected 15bp), the forint did not react visibly and is closely following the USD development. All in all, the faster pace of monetary tightening should support the EURHUF in moving toward our medium-term forecast of 350. Ahead of this week’s MPC meeting in Czechia, the koruna strengthened and returned to our quarter-end forecast at 25.5 vs. the EUR. Markets are currently pricing in two interest rate hikes in 2H21. We remain more cautious and, besides this week’s hike, the CNB could in our view raise the key rate one more time, conditional on a favorable pandemic situation. However, if the CNB is more aggressive, the koruna will most likely appreciate stronger than currently expected.

Bond market developments

Following last week’s more aggressive than expected monetary tightening in Hungary, we revised our interest rate outlook and expect the Hungarian central bank to deliver a 30bp hike at each of the two meetings in August and September. Thus, the key rate would land at 1.8% and the MNB would end the current tightening cycle. The August MPC meeting (due August 24) could not only deliver another 30bp hike, it could result in a change of QE guidance, as the threshold of HUF 3000bn might soon be reached. While the 10Y German Bund remained locked at -0.45% throughout the week, we have seen quite substantial increases on the long ends of LCY curves in CEE. The Polish 10Y yield jumped by an additional 20bp to 1.75%, while the 11Y Serbian paper went up by 15bp to almost 3.4%. Surprisingly high inflation for July pushed market expectations for rate hikes marginally up in Poland and a 10bp hike is priced in by the end of the year. The Polish NBP announced the date of its next QE auction, which should take place on August 18. Elsewhere, the Romanian MinFin plans to tap the local currency market with RON 3.7bn in August.

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