Focus on GDP data and central bank meeting in Czechia

The upcoming week will be filled with important releases. On Tuesday, Czechia, Hungary and Serbia will publish their 1Q24 GDP data alongside the release of Eurozone performance. The sentiment indicators suggest that we should see some recovery of economic activity at the beginning of the year. Further, on Thursday the Czech central bank holds a rate-setting meeting and a 50bp cut to 5.25% is broadly expected. It will also be interesting to see the communication regarding further steps. Apart from GDP releases and the central bank meeting in Czechia, flash inflation for April will be published in several CEE countries (Croatia, Poland, Slovenia and Slovakia within HICP flash estimates) as well as industrial output and retail sales growth for March in Croatia and Serbia.

FX market developments

Recent weeks brought some strengthening of the Czech koruna, ahead of the central bank’s meeting. A 50bp cut in the key interest rate has become the broad consensus. Central banker Holub, who would have supported a 75bp cut at the previous meeting, said that a 50bp cut on May 2 is optimal, given that new arguments support a more cautious approach. Zamrazilova would consider either a 25bp or 50bp cut at the upcoming meeting, as she continues to see inflationary risks. Governor Michl underlined that the future steps will remain cautious. It will be therefore interesting to hear the communication about further steps, also in light of the new estimates of neutral interest rate. If that estimate increases, risks for a higher interest rate at the end of the year will visibly increase. Further, the EURHUF moved down toward 391 while the EURPLN held at 4.31. In Poland, MPC member Kotecki said that stability of rates is the most likely scenario this year.

Bond market developments

Government bond yields in CEE edged up a little last week, following upward moves in benchmark curves – the US Treasury and the German Bund yield curve. The most pronounced was the shift in the CZGBs yield curve, where Thursday’s MPC decision should provide more clarity on the future pace of monetary easing. 9x12 FRAs increased 100bp since mid-March and returned to 4.2%, already betting on a slower pace of monetary easing compared to previous market expectations and our forecast. In Hungary, 9x12 FRAs moved even more visibly in previous months, by almost +200bp since mid-January and reached 6.6% last week. We have seen from the published fiscal figures for 2023 that higher interest costs inflated Hungary’s public deficit to GDP ratio by 2pp compared to the previous year. In order not to lock in higher interest costs, the Hungarian debt agency successfully placed two floaters HGB 2029 and HGB 2032 last week, which saw good demand, and thus bids were accepted at a higher volume compared to the indicative offering (HUF 15bn+30bn compared to 2x HUF 10bn). The Czech Ministry of Finance announced its plans for bond issuance in May, which is targeted at CZK 19bn, thus slightly lower volume compared to April’s CZK 23bn. On top of that, it plans to issue T-bills worth CZK 10bn.

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