Hungarian central bank to cut rates further

The upcoming week in the CEE region will see several economic releases. On Monday, Poland will report its industrial production and PPI for March, with expectations of contraction by -1.4% and -9.5% y/y, respectively. On the same day, wages in Poland will also be released, with expected 12% annual growth. The following day, Polish retail sales for March will be unveiled and could rise as much as 7.20% y/y. Hungary’s Central Bank Rate decision will be announced on Tuesday, with a forecasted rate of 7.75%, amidst continued high inflation of market services and the forint’s vulnerability. Poland’s unemployment rate for March is expected on Wednesday, and on Thursday Serbia will release its February wage growth data. The week will conclude with Hungary’s March unemployment rate, which is expected to ease to 4.60% from 4.70%. Slovakia’s PPI for March is forecasted to show a reduced y/y drop of -13%. Lastly, Slovenia’s retail sales for March are expected to show a downturn, moderating to -1% from -5.60% y/y, indicating a potential easing in the retail slump.

FX market developments

The Hungarian central bank is expected to continue with monetary easing and a few scenarios are in play. Our baseline is a 50bp cut in line with Deputy Governor Virag's implication of a slower pace of rate cuts. However, a higher rate cut at the upcoming meeting cannot be ruled out, assuming that the central bank would take a break and wait for major central bank decisions before moving further. The development of the Hungarian forint and its weakening against the euro over the last week also favors a more cautious step. The Polish zloty has depreciated against the euro as well, while the Czech koruna holds stronger. In Czechia, central banker Prochazka was quite explicit about the pace of monetary easing that the central bank should maintain the current pace of a 50bp cut at the upcoming meeting (scheduled for May 2) and beyond. Polish MPC member Wnorowski commented that the latest government plan to keep a lid on energy prices increases the probability of monetary easing this year, as it should keep inflation intact. As for other news regarding Poland, the European Commission disbursed to Poland the first payment of EUR 6.3bn (net of pre-financing), with EUR 3.6bn in loans and EUR 2.7bn in grants under the Recovery and Resilience Facility (RRF). Poland plans to submit two other motions by September and receive the payments by the end of the year, which could be worth as much as EUR 10bn. Poland's recovery and resilience plan will be financed by a total of EUR 59.8bn in grants and loans.

Bond market developments

LCY yields have increased throughout the week, mimicking development on the core markets. While the ECB is getting ready to begin with monetary policy in June, the signals coming from the US and the Fed suggest that interest rate cuts may come later than initially expected due to less favorable inflation development in the US. On the local bond market, Romania successfully placed local currency government papers, as demand was solid. Slovakia sold a total of CHF 625mn in 4Y and 10Y bonds priced at MS+45 and MS+70, respectively. As of mid-April, Slovakia had completed roughly 70% of this year's borrowing needs, according to our estimate. This week, Czechia, Poland and Romania have auctions scheduled.

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