Diverging inflation developments in CEE

June inflation prints will be in the spotlight this week. After the April-May peak, consumer prices are expected to have moderated a bit to 3.1% y/y and 1.8% y/y in Serbia and Croatia, respectively. Romanian inflation could have reached 3.72% year-over-year in June and is likely to remain above the NBR’s target until early-2022 on energy price deregulation, higher oil price, and imported inflation. Czech inflation is anticipated at 2.8% y/y (close to the upper bound of the tolerance band), reflecting the tight labor market as the key pro-inflationary factor, accompanied by some supply-side effects. Consumer prices likely grew by 2.5% y/y in Slovakia, spurred by excise taxes on tobacco and rising oil prices (from a lower base). The Polish flash CPI reading of 4.4% y/y should be confirmed, with core inflation coming in likely at a milder 3.5% y/y pace. Moreover, Romania will publish its industrial production and wage development for May. We expect the industry to have risen by 42% y/y, driven by the low base from last year and flourishing foreign demand for manufacturing. The base effect also played a role in the May wage growth in Romania, which is expected just shy of 10% y/y.

FX market developments

Over the course of the week, CEE currencies weakened considerably due to both global and local factors. Growing market concerns over the impact of the Delta variant of the coronavirus on economic recovery weighed on CEE FX. Higher than expected inflation for June, which came in at 5.3% y/y, as well as the recently inflamed conflict between the EU and Hungary, increased the pressure on the forint. The EURHUF went slightly above 358, which is the weakest since mid-May when the central bank pledged to tighten. On the other hand, given the recent worsening of the global pandemic situation, the markets somewhat doubt whether the Czech National Bank will deliver another hike already in August, resulting in the koruna moving toward 25.8 vs. the EUR. The Polish zloty followed its regional peers as the central bank stuck to its dovish stance despite the elevated inflation forecast. Given the approaching tourist season, we expect the Croatian central bank to remain active on the market in order to keep a lid on the appreciation of the kuna.

Bond market developments

Bond yields inched down on global markets as investors switched to risk-off mode due to concerns over the rising number of Delta variant COVID-19 cases. LCY 10Y yields declined also in CEE with the exception of Romania. The most pronounced yield decline could be seen in the middle of the CZBGs curve and the long end of the HBGs curve. The first could be linked to concerns over the economic risks related to the Delta variant, which the central bank downplayed in its comments when it kicked off the start of the tightening cycle. This sparked speculation regarding a delay in the next hike. The Hungarian long end definitely benefits from last week’s ECB announcement of a change in the target, which will allow the ECB to keep its monetary policy accommodative for longer. Romanian yields increased despite the successful placement of two large and long-dated (9Y and 20Y) Eurobond issues. The MinFin rejected a significant portion of bids in its latest auctions, as it feels more comfortable on the financing side now and is more selective on price. Romania PM City forced out the finance minister from his government, which could be seen as part of an internal fight within the Liberal party ahead of the party leadership election scheduled for September. PM City will also serve as interim finance minister.

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