Czech and Hungarian central banks to meet for the last time in 2022

This is the last edition of CEE Market Insights in 2022. We will return to you on January 9, 2023. We wish you happy holidays.

Hungary and Czechia will hold the last rate setting meetings this year. In Hungary, we do not expect any changes in interest rates or the central bank’s communique. The new inflation and growth forecast will be published. In Czechia, stability of rates is the most likely scenario as well, as suggested by several board members in recent comments. In Poland, industrial output and retail sales growth for November will be published, which should enable us to assess the extent of the slowdown at the end of the year. Apart from that, labor market data will be released throughout the week, as the unemployment rates for November are due in Slovakia, Croatia and Poland, while wage growth will be published in Croatia and Poland.

FX market developments

This week, two major central banks, the FOMC and ECB, continued their fight against high inflation by increasing the key interest rate by 50bp. In the case of the Fed decision, we have seen local currencies strengthening and yields moving down in response to the lower pace of tightening. The lower-than-expected inflation footprint in November in the US also contributed to this development. The ECB decision did not bring any major reaction to the local FX market but did push yields up.

It seems that, throughout the week, local news was of greater importance, especially for Hungary, which had its recovery plan accepted, keeping the path open to EUR 5.8bn in RRF funds. After the announcement, the Hungarian forint strengthened against the euro more visibly, resulting in the week-to-date 3% appreciation.

This week, the Czech and Hungarian central banks will hold their rate setting meetings for the last time this year. In both countries, we expect the main interest rates to remain unchanged. In Czechia, several board members (Dedek, Kubelkova), including the governor, have confirmed that they see the current level of rates as high enough to curb inflation. In Hungary, the one-day deposit rate remains the effective interest rate. Although the dispute over the rule of law and access to EU funds by Hungary seems to be moving in the right direction (judging by the strengthening of the Hungarian forint), the FX market still needs to prove its resilience before the one-day deposit rate and key policy rate can be merged.

Bond market developments

CEE bond yields moved up last week in reaction to the less pessimistic development of sentiment indicators for Germany as well as more hawkish comments from the ECB, which hinted at the continuation of rate hikes at a steady pace. Furthermore, it was emphasized that interest rates would remain in the restrictive range for longer. Hungarian bonds were outliers in the region, as their 10Y yields collapsed -60bp w/w, boosted by positive news on the acceptance of Hungary’s Recovery Plan by the EU, which now just needs to be formally approved. This week, the auction calendar with be rather empty, as only Hungary and Romania announced their borrowing plans. Romania is going to reopen ROMGBs 2026, 2027, 2029 and 2032, while Hungary is going to issue T-bills and reopen HGBs 2027.

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