Hungary prepares for normalization of interest rates

The MPC meeting in Hungary will be the most watched event of this week in CEE. We do not expect a change of the one-day deposit rate, which currently stands at 18%, but lowering of the upper bound of the interest rate corridor, as signaled by Deputy Governor Virag last week, could to be the first step towards normalization of interest rates in Hungary. We believe that the upper bound could be cut by 250bp, from 25% to 22.5% this week, and lowering of the one-day deposit rate could start in May with a 100bp cut. Monetary conditions are currently extremely tight in Hungary - money supply growth is already negative, while the forint has appreciated more than 5% vs. the euro since the beginning of the year and has clearly outperformed its regional peers. From this week’s data releases, flash estimates of April inflation for Poland and Slovenia should not lack for attention. Large drops in headline inflation are expected in both countries - in Poland from 16.1% to 14.8% and in Slovenia from 10.5% to 8.5%. Furthermore, April economic sentiment data will be released by individual countries and later by the European Commission.

FX market developments

CEE currencies showed a mixed development last week. While the Polish zloty remained on an appreciation path, approaching its 10-month high vs. the euro, the Czech koruna experienced about a 1% correction after reaching a 15-year high vs. the euro (CZKEUR at 23.200) the week before. The Hungarian forint was on a roller-coaster ride last week, shaken by news that the Hungarian central bank could start cutting rates already at this week’s meeting. We think that the market overreacted, as a cut of the upper bound of the interest rate corridor should not have any material impact on FX. The central bank will likely outline its readiness to cut rates in the following months, but make it data-dependent. The announcement of preparation for normalization of interest rates could also be seen as a verbal intervention against the forint and an indication that the EURHUF below 370 is seen by the central bank as too strong.

Bond market developments

The HGB curve experienced a 40-50bp downward shift in the aftermath of strong comments from Deputy Governor Virag, who sent markets a clear signal that the first steps toward normalization of interest rates in Hungary could start already this week. Regarding last week’s debt issuance, debt agencies in Slovakia, Hungary and Romania raised more money than they initially planned to borrow. Slovakia's ARDAL increased its YTD gross issuance to 62% of its full-year plan, with the rest to be completed in five remaining auctions. This week, Romania will offer ROMGBs 2028, 2030, 2032, and 2036, Serbia two bonds, Czechia T-bills, one coupon and one floater bond. Hungary will offer T-bills on top of regular bond auctions.

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