Hungarian monetary policy toolkit gets simplified

This week, the last week of September, is packed with new data releases. On Monday, Poland will publish its unemployment rate while Serbia will release wage growth data. Tuesday marks one of the most important events of the week as the Hungarian Central Bank is expected to align its one-day deposit rate with the policy rate at 13%. The focus will also be on details about simplification of the monetary policy toolkit and new forecasts from the MNB. The simplification is intended to create a symmetrical rate corridor at about 100bps, without affecting the path of monetary policy. On Wednesday, the Czech Central Bank will hold a rate meeting, but no change in the interest rate is expected. The central bank's communication will be the most interesting aspect of the meeting. Thursday is quieter, with Hungary publishing its PPI and Slovenia releasing retail sales. On Friday, the last working day of September, we can expect the biggest batch of releases. Inflation data will be published for Slovenia and Poland, while Serbia and Croatia will release industrial production and retail sales. In addition, Serbia will reveal its trade balance for August; Hungary will show its current account balance and unemployment. On Saturday, the early elections will be held in Slovakia. The latest polls favor the opposition party SMER led by the former PM Fico and non-parliamentary Progressives for the victory but the decision which one forms the government will strongly depend on number of smaller parties surpassing the threshold and getting into the parliament.

FX market developments

Last week brought a mixed development for CEE currencies, especially when we look at two countries where central banks will decide on rates this week. The Czech koruna slightly firmed against the euro, as Governor Michl reassured the markets that no rate cuts should be expected in the near future. Nevertheless, we believe that the Monetary Policy department will envisage already at this week’s MPC meeting that an early start of the easing cycle is economically fully justified. In Hungary, the HUF lost about 1% w/w vs. the euro last week, but there could be other reasons than expectations of this week’s rate cut, which has already been priced in and well communicated by the central bank. On the political side, Hungary has further delayed the ratification of Sweden’s NATO membership. The budget performance also seems to need some new patches.

Bond market developments

Last week, we saw an increase in long-term yields across the region, with a more visible shift after the FOMC decision and the following press conference with Fed Chairman Powell, who said that the FOMC was not yet sure about the appropriate level of interest rates. The US 10Y yield increased above 4.5% for the first time since 2007. The region followed global developments. The CEE countries with their own currencies and monetary policy setting experienced greater increases in long-term yields (about 20bp w/w) than those belonging to the Eurozone. The upward shift of local currency yields reflects not only the uncertainty about the major central banks’ decisions, but also rising concerns about inflation development. The most recent oil price changes already led to upward revision of the inflation forecast in the Eurozone and pose a risk for a further dynamic decline of headline numbers in the region as well.

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