Hungarian central bank to pause monetary easing

This week, the Hungarian central bank is the key event in the region. Although Hungary's inflation rate eased further in September, the Hungarian forint has weakened against the euro lately, supporting no change in the key policy rate scenario. Apart from Hungary, Poland will release important data. September's industrial output and retail sales growth will be published. Thus, Poland will have a complete set of monthly data for the third quarter. Finally, labor market data, such as the unemployment rate, will be released in Croatia, Poland, and Hungary. Wage growth will be released in Croatia and Serbia. On Friday S&P will decide on rating and outlook in Hungary and Slovakia. No change is expected.

FX market developments

Throughout last week, the EURPLN and EURHUF levels remained elevated. EURHUF was at or above 400 while EURPLN moved above 4.30 toward the end of the week. At the end, the week-to-week change was rather marginal. The Czech currency held slightly stronger against the euro throughout the whole week. In Czechia, central banker Holub called for more aggressive monetary easing due to anti-inflationary risks in the economy. On the other hand, Governor Michl reiterated his pledge to move cautiously.

This week, the Hungarian central bank

holds a rate-setting meeting, and we expect no change in the key policy rate due to the weakness of the Hungarian forint. Such a scenario was suggested by Deputy Governor Virag, who indicated a break in monetary easing. Further, it seems that the break may last for a "sustained period" if the external environment and inflation outlook justify a cautious approach. The end of the monetary easing cycle at this point is likely to support the Hungarian forint, which appreciated against the euro in response to such news.

Bond market developments

The CEE bond market showed mixed performance over the last week. The long-term yields in the Eurozone countries inched down as the ECB decided to lower interest rates by 25 basis points. In other countries, particularly in Hungary, the long end of the curve shifted up in response to Deputy Governor Virag's comments that the pause in monetary easing is not likely to be temporary only. Poland tapped the international bond market, selling EUR 3 billion of 7Y and 15Y government papers. According to the Ministry of Finance, there are no plans for issuance on the euro or dollar markets this year. The financing of 2024 borrowing needs is almost completed, and Poland will begin pre-financing of 2025 borrowing needs in the remainder of the year. Finally, the 2024 budget revision is likely due to recent floods. Romania held a successful bond auction of 2035 government papers as demand was strong, with a bid-to-cover ratio at 1.65. This week, Slovakia, Czechia, and Poland have bond auctions scheduled.

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