CEE: February’s inflation and two central banks meetings

Several CEE countries will publish February inflation figures. In Hungary and Slovakia, inflation should decrease. Romania should also see a drop, but the decline will be marginal, due to the increase in natural gas prices. In Poland, February’s inflation was elevated above 5%. There are two central bank meetings scheduled this week. In Poland, we do not expect any change in the policy rate. However, the new inflation and growth projections will be published, which may shed additional light on when monetary easing can be expected in Poland. Serbia is to remain on hold, with inflation above expectations and the target. Industrial output growth in January will be released in several CEE countries (Slovenia, Slovakia, Romania and Czechia). In Czechia, retail sales growth will be published as well. Trade data is due in Slovakia, Czechia, Romania and Serbia, as is wage growth in Slovakia and Romania. Finally, on Friday after market close, we have ratings reviews for Croatia (Fitch and S&P), Poland (Fitch) and Romania (Moody’s). Only for Romania do we see the possibility of an outlook change from stable to negative. This should have a limited impact on markets, however, as Fitch and S&P have already assigned negative outlooks.

FX market developments

The CEE currencies remained strong throughout the week. The EURHUF went below 400, supported by the comments from the new central bank leadership that there is little room for monetary easing at the moment. Although the most recent inflation developments do not allow for cutting interest rates, we believe there may be such space in the second half of the year, and we maintain our forecast of two interest rate cuts (25 basis points each) later this year. The EURPLN went as low as 4.15. This week, the Polish central bank is expected to keep the key policy rate unchanged. Nevertheless, the EURPLN may be affected by the outlook on the timing of monetary easing. New inflation and growth projections may prompt more intense discussions on when the rate cuts should and can be delivered. In Serbia, stability of rates is the baseline scenario for the upcoming meeting.

Bond market developments

Last week, government bond yields in CEE moved up 20-30bp w/w, primarily in response to the substantial rise in German Bund yields (+40bp w/w). The announcement by the new German political leadership of the relaxation of fiscal rules and establishment of a new EUR 500bn fund for financing infrastructure projects and military expenses has been perceived by markets as a game changer. This initiative is expected to provide a strong stimulus to the German economy, with potential positive spillovers into the CEE region, potentially counterbalancing some economic risks associated with the introduction of tariffs by the US. On the other hand, central banks may have fewer reasons to cut interest rates if the growth outlook remains solid and inflation persists. Last week, the Slovak debt agency successfully sold EUR 500mn worth of retail bonds with maturities of 2 years and 4 years, yielding 3% and 3.3%, respectively. The offered yields were 25-35bp higher compared to Croatia’s issue, which sold EUR 3bn through 2-year and 5-year bonds, yielding 2.65% and 3.05%. Only the shorter-term bonds were offered to the retail segment, where EUR 590mn was accepted.

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