Regional currencies and government bonds benefit from the ECB aggressive easing

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Regional currencies and government bonds benefit from the ECB aggressive easing. What about central banks?

The ECB’s decision to start buying large volumes of bonds has also had an impact on Central European markets, with regional currencies mostly appreciating against the euro. While the koruna strengthened only slightly, the appreciation of the zloty and the forint was more evident. Naturally, regional government bonds also fared well, with their yields falling dramatically, just like in the euro area.

The aftermath of the ECB’s aggressive move may influence central banks in the region. This primarily applies to the National Bank of Poland and the National Bank of Hungary. The Hungarian and the Polish economies remain in deflation, and thus the ECB’s surprisingly large expansive move may stand both the NBP and the NBH in good stead, as these central banks no longer need to be overly afraid that their own rate cuts would put the exchange rates of their respective local currencies at risk. Bear in mind that both the forint and, in particular, the zloty weakened significantly a week ago in reaction to the rapid appreciation of the Swiss franc, and this optically reduced the margin of discretion for further monetary easing. This has understandably changed now in the wake of the ECB move and we do not think that Left opposition party Syriza victory in the Greek elections would change this conclusion too much.

Recall that our hypothesis would be already tested tomorrow when the NBH Monetary Council meets. Still, in our view the NBH would like to see the inflation figure for the January and how the ECB's decision influenced the Hungarian market. Thus, we think that a rate cut may rather come in February, if the market environment remains supportive. In that case the NBH may re-start an easing cycle with a 20bps rate (rather than just 10 bps).