Central bank meetings in Poland and Serbia in focus

This week in CEE

This week will bring a harvest of inflation data for the CEE region. In most cases, we expect that the y/y inflation rate decelerated in December compared to November (in Croatia, Czechia and Serbia) or remained unchanged (in Slovakia and Romania). Hungary is the only country for which we expect inflation to notch upwards (+0.1bp), driven by higher m/m inflation as a result of higher fuel prices. Poland should confirm its flash estimate of December inflation, which surprised to the downside. Inflation undershooting the inflation target at the year-end and the central bank intervening against its own currency sparked bets on the central bank cutting rates to zero (-10bp). The central bank meeting will take place this Wednesday. We stick to a stability of rates scenario, given the likely stronger than expected GDP growth and inflation returning to the target in 2H21. A central bank meeting will also take place in Serbia. After cutting rates in December, the central bank will likely remain on hold this time.

The CEE Recovery Index dropped sharply in the last week of 2020. The re-introduction of tighter restrictions after Christmas as well as the holiday season itself dragged mobility down. Mobility decreased across all categories, with the sharpest drop in mobility to the workplace. At the turn of the year, mobility to the workplace was below the trough reached in mid-March. Although mobility should gradually recover in January, it will likely remain dampened, as the current restrictions are strict and are expected to remain in place in the coming weeks across the CEE region. On the other hand, electricity consumption increased quite visibly at the end of the year, which could have been due to colder weather and the holiday season. Capacity utilization in the automotive sector remains unchanged at the prepandemic level, as the current restrictions affect the retail and services sector and, to a lesser extent, manufacturing.

FX market developments

The US dollar depreciated in the first half of the week, creating a positive environment for CEE currencies. Especially the zloty and the forint appreciated in the first few days, but gains reversed in the second half of the week as the US dollar also reversed its earlier weakening. In Poland, the lower than expected inflation release increases the room for the NBP to possibly weaken the zloty. This makes it riskier to see appreciation in the PLN in the short-term. After the temporary appreciation of the leu during the start of the year, the EURRON returned to around 4.87. In Croatia, the EURHRK continued its increasing path that started in mid-December with the rate approaching 7.57. The central rate in the ERM2 mechanism was set at 7.5345, but the kuna tends to be weaker out of the tourist season.

Bond market developments

The previous week saw notable (+20bps w/w) increases in 10Y UST yields, but this was not really followed on the Bund market, nor in CEE bonds. Yields only edged up marginally. As for rates, some very small increase was seen in Hungary. On the other hand, Polish rate expectations dropped by around 5-10bps (looking at FRAs) after explicit comments from rate-setters about a possible easing in 1Q21. While inflation was lower than expected in December, the economy should rebound this year, making it questionable if a cut is really necessary. In Czechia, Governor Rusnok hinted that no 'more fundamental discussion' on rates is expected before May.

In case you missed

PL: Inflation dropped visibly at end of 2020.

SK: Retail sales affected by second wave. Import growth returned in November.

RO: Retail sales remained in good shape in November. Sentiment improved in December.

HU: Retail sales growth remained in red in November. Industry slowed down as well.

CZ: Industrial production decreased in November.

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