Hungarian central bank meeting

This week, the Hungarian central bank is to hold its regular meeting at which the decision on the main policy rate is undertaken. Currently, this rate sits at 13%, but after a recent emergency decision, the one-day deposit rate of 18% is the effective rate. Thus, we do not expect any changes to be made at the upcoming meeting. Meanwhile, Croatia and Slovenia will publish retail sales growth figures for September. While dynamic expansion is broadly expected for Slovenia, for Croatia, retail trade is not expected to have grown. Aside from that, the unemployment rate will be released in Poland and Hungary and the PPI Index will be published in Slovakia and Hungary.

FX market developments

Regional currencies appreciated throughout the week, with the Hungarian forint gaining the most against the euro. Compared to the highest EURHUF level above 430 shortly before the emergency move, the forint has strengthened roughly 4.5% since then. This week, the Hungarian central bank holds its regular rate setting meeting on Tuesday, but we do not expect to see any changes in the main policy rate, which currently sits at 13%. The effective and relevant interest rate for the markets is the one-day deposit rate at 18%, and it will remain in place until the risk assessment improves significantly. In Poland, the dispute over the monetary policy direction heated up last week, with former central bankers openly criticizing the current monetary policy approach. The hawkish MPC members (Kotecki and the most recently nominated Turowicz) that would welcome interest rate hikes remain in the minority, however. On the monetary policy front, an interesting development is also happening in Czechia, as more voices have been raised on interest rate hikes. Most recently, board members Mora and Dedek expressed their willingness to tighten monetary conditions to curb inflation.

Bond market developments

Last week, LCY bond yields moved up across CEE except for Hungary, with Poland as a clear underperformer. The whole POLGB yield curve moved up more than 100bp w/w, so twice as much as the Czech one. The yield on 10Y POLGBs approached almost 9%, which resulted in spread compression vs. 10Y ROMGBs, currently at around 70bp, or less than half the median value observed in the last 12M. Although FRAs 9x12 increased by about 100bp over the last two weeks, the increase in POLGB yields does not seem to be driven only by renewed higher interest rate expectations, as 10Y POLGB yields increased much more than 10Y PLN swaps and their spread widened to 100bp, far above the long-term average of 25bp. Poland’s CDS remained almost unchanged. The current sell-off on the POLGB market could be related to market beliefs that the central bank is behind the curve in its tightening, thus weighing on the currency outlook. Indeed, 3M implied yields derived from FX forwards are hovering above 10%. The auction calendar is rather empty this week, with only ROMGB 2027, 2032 and Hungary’s T-bills being offered on top of regular auctions.

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