Central banks need to reflect the bold step in Czechia

A very busy week ahead awaits in CEE. Three regional central banks will take over the center stage. Romanian central bank will start with its Tuesday meeting, where it is anticipated to keep its key rate on hold at 1.25%, citing lack of clarity related to the pandemic (with the fourth COVID wave in full swing). Moreover, political uncertainty remains, with the no-confidence vote scheduled on the same day. However, once that is cleared, a hike in November should follow as suggested by rising domestic inflationary pressures, weak fiscal adjustment, currency weakness, and a narrowing real interest rate differential vs. peers against the backdrop of a divergent external position. Last week’s surprising 75bp rate hike from the Czech National Bank puts the Polish central bank into a less comfortable position. Albeit we do not expect any changes to the 0.1% key rate at the moment, a November hike is back on the table as flash September inflation shot up to 5.8% y/y. Serbian central bank meeting on Thursday should confirm the key rate at 1%, as core inflation remains low and stable. Moreover, September inflation will be published in Hungary where it may have risen to 5.4% y/y, courtesy of an unfavorable base effect and higher fuel prices. Czech and Hungarian industrial production prints for August should reflect the supply chain problems and an unhelpful base effect, thus slowing down to 2.3% and 4% y/y, respectively. Finally, retail sales data for August will be published in several CEE countries. These should retain solid but divergent growth paces – with some moderation anticipated in Romania and Hungary, compared to an acceleration in Slovakia and Czechia.

FX market developments

While the US dollar extended its gains and the EURUSD moved below 1.16, the strongest level since the end of July 2020, CEE currencies were a mixed bag. The Czech koruna benefited from the unprecedented move of the central bank, as the key rate was raised by 75bp to 1.5%, and appreciated toward 25.3 vs. the EUR. We expect the CNB to continue with monetary tightening in the reminder of the year, conditional on the FX development. Elsewhere, the Polish zloty strengthened, on the back of the minutes of the September rate setting meeting and upward surprise in September inflation, which could have increased the chances for a rate hike already in November. Should this week’s MPC meeting disappoint those expectations, the Polish zloty could depreciate beyond 4.60 vs. the EUR. Separately, we revised our EURHUF year-end forecast up to 355, given the increased global risk aversion, smaller than expected rate hike as well as quarter-end turmoil on the swap market.

Bond market developments

Last week, we saw a pretty substantial w/w increase of 10Y LCY government bond yields in CEE, ranging within 10-35bp. The increase was purely driven by local factors. ROMGBs suffered from the deepened political crisis, as the confidence vote against the government scheduled for Tuesday has a high chance of succeeding. Despite the surprisingly high rate hike (+75bp) delivered by the CNB, yields on 10Y CZGBs increased only 10bp w/w. The hike primarily impacted the short end of the CZGBs yield curve. Obviously, the market believes that frontloading of hikes could help to tame inflation in the mid run. We revised our call for the interest rate path and see the key rate at 2% in December, with the peak at 2.5% in 2022. Our model implies the key rate at 2.25% in 2023, conditional on CZK appreciation, which may mitigate the need for aggressive hikes. After the very decisive CNB move, the pressure on peer central banks to hike is clearly mounting. In particular, the NPB is coming under strong cross-fire, with headline inflation climbing to 5.8% in September (according to the flash estimate) and the key rate staying at 0.1%. This week, Romania will reopen ROMGBs 2024, 2025, 2027 and 2034 and offer T-bills. Hungary will also offer T-bills on top of regular bond auctions.

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