Further tightening in Hungary, flash GDP in Czechia

This week Hungary is in the spotlight. First, the central bank is holding a rate-setting meeting. Given the inflation development, it comes as no surprise that monetary tightening will continue. We expect another 100bp hike of the key policy rate (to 5.4%), while the one-week deposit rate should be raised by 30bp (to 6.45%). The outlook should not change much and monetary tightening should continue until mid-summer. Further, political developments in Hungary are likely to attract attention and on April 27 a letter from the European Commission is expected to shed more light on the rule of law proceedings and the underlying threat of EU funds suspension. As far as other events are concerned, Czechia will be the first to publish flash 1Q22 GDP data and our expectations sit at 4.1% y/y (0.1% q/q), reflecting mostly the impact of high energy prices and supply chain bottlenecks. We will also see March industrial output and retail sales growth in Croatia and Serbia. In Croatia, we expect modest growth figures, in line with the deteriorating growth outlook. In Serbia, the retail sales footprint is likely to remain relatively solid, reflecting recent wage and pension increases. Last but not least, inflation in Slovenia is expected to rise to 6.5% in March.

FX market developments

Local currencies had a calm post-Easter week, with only the Hungarian forint strengthening a bit more to 371 vs. EUR. The HUF is gearing up for this week’s central bank decisions on widely expected rate hikes. Increase in the base rate is considered as rather formal issue but slower or no increase in the one-week deposit rate (we expect +30bp to 6.45%) could trigger a negative reaction on forint. The Polish zloty ended the week close to 4.64 against the euro, while the Czech koruna inched to a stronger level of 24.36 vs. EUR. Polish MPC member Litwiniuk “is hoping” that the central bank is coming closer to the end of its rate hiking cycle. He said inflation should peak at around 17% between June and September. The Czech central bank Governor Rusnok expects a careful debate on the use of FX reserves to tackle inflation at the next meeting in May, but he sees any further rate hikes as rather cosmetic. Given hawkish comments from top ECB officials, markets have upped their bets on the ECB as they now price in 80bps of rate hikes by December. Traders raised their bets and now see an 80% chance of a 25bps hike in July.

Bond market developments

Yields on global markets continued to increase last week, as more central bankers openly voiced support for earlier or bolder monetary tightening. Yields on government bonds also increased in CEE, where inflation continues to surprise on the upside and central banks are likely to address higher inflation via further rate hikes. However, some signs of hesitation started to be seen in the CNB, where the governor rightly pointed out that a reduction of the central bank’s balance sheet would be worth discussing and might be a more efficient and faster way of curbing inflation than further rate hikes. In Poland and Hungary, 5Y yields climbed to 6.9-7.0%, thus exceeding 5Y yields on ROMGBs. The POLGB curve actually moved up 40bp w/w as the economy is growing fast and inflation is expected to increase further. The comment from Polish MPC member Litwiniuk that inflation should peak at around 17% between June and September certainly raised the eyebrow of every fixed-income investor exposed to POLGBs or PLN. This week, the auction calendar is pretty empty, with only Czech and Hungarian T-bills to be issued on top of regular auctions.

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