Central banks meetings in Czechia and Hungary

This week in CEE

All discussion is focused on the impact of the coronavirus on the economic activity. We have revised our CEE growth forecast down (Slovakia to contract 1% in 2020, Czechia 0.5%), but downside risks prevail. The adverse scenario, which assumes an extended period of lockdown and production breaks (with growth diving deeper into negative territory toward -3%) slowly becomes reality as countries begin to prolong preventive measures. Releases of economic data that come with at least a monthly delay say little about the current situation. Leading indicators in the Eurozone will thus be in focus this week. Locally, Czech and Hungarian central banks are to hold rate-setting meetings. In the case of Czechia, another 50bp cut seems to be only a matter of time, as there may still be a preference to wait until May and the new inflation and growth projection. As far as Hungary is concerned, the central bank is expected to announce liquidity-supporting measures and present the new forecasts.

FX market developments

Currency moves were extremely hectic last week, but by the end of Friday, w/w changes in the CZK, PLN and HUF were very close to each other. Moves in the Croatian kuna is muted by the central bank, intervening EUR 1.6bn since pressures started to mount. Still, as the CNB has had firepower equivalent to 40% of GDP at the beginning of March, the current situation seems sustainable for now. In Romania, the NBR is also likely standing there to tame pressures. Elsewhere in the region, central banks are not that activist with interventions. Therefore, high volatility is expected in other regional currencies, depending on actual news with regards to the coronavirus outbreak.

Bond market developments

Bond markets experienced a drastic drop in trading volumes last week which was accompanied by major yield increases and hectic moves in most cases. Eurobond markets saw similar (or even more severe) decline in liquidity. Yield levels may therefore be less reliable than usual. An important feature is the increasing activity of local central banks on bond markets too, besides providing liquidity. In Croatia, the CNB purchased HRK 4.3bn, while the NBP also bought a total of PLN 2.6bn in 2Y, 5Y and 10Y paper. The Czech CNB has not announced bond purchases yet, likely due to the very high liquidity already present on the market. The Hungarian central bank also did not opt for purchases, but continues to provide liquidity in 1-week FX-swap tenders on a daily basis. These could see different allocation volumes, depending on the HUF exchange rate.

In case you missed

CEE: Coronavirus brings recession to CEE.
CZ: Government announced program worth 18% of GDP to support economy.
HR: Inflation eased to 1.5% in February.
PL: Solid industrial output growth and robust retail sales in February. Government proposed support measures worth 9% of GDP, including 2.7% of GDP cash component, while central bank eased monetary conditions.
RO: National Bank of Romania cut rates and announced other liquidity supporting measures.

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