Hungary to keep rates, S&P to review Slovakia

Hungary’s central bank is expected to keep the policy rate unchanged at its upcoming meeting. Meanwhile, in Poland, industrial production and retail sales data for September will be released, completing the monthly data set for the third quarter. Furthermore, unemployment and wage growth figures will be published not only in Poland but also in Croatia, Slovakia and Hungary. Producer price data will also be released in Poland and Slovenia. Last but not least, S&P will review Slovakia’s sovereign rating and outlook on Friday after the market close. We do not expect any change in the sovereign rating. In our view, the rating agency is more likely to wait until spring before taking any action. Although the budget had not yet been approved at the time of our discussions with the agency, its previous debt projections already included sufficient headroom to accommodate the additional borrowing envisaged in the budget. We also consider a revision of the outlook to negative unlikely at this stage, although it cannot be entirely ruled out.

FX market developments

CEE currencies strengthened slightly against the euro last week. In global markets, oil prices and energy prices remain elevated as the war with Iran continues to disrupt global oil supplies. Furthermore, Bundesbank President Nagel said that the European Central Bank's job of fighting inflation is not yet done and that he believes policymakers will need to take further action. On the other hand, French central bank governor Moulin said that the rise in borrowing costs for eurozone governments could influence the European Central Bank's response to inflation, as higher borrowing costs are already contributing to tighter financial conditions. Governing Council member Dolenc shares the view that tighter financial conditions could reduce the need for further ECB action. Locally, Hungary's central bank will hold a rate-setting meeting on Tuesday, and we expect the key policy rate to remain unchanged at its current level of 5.5%. Overall, the monetary policy stance in Hungary is expected to remain tight for the time being, despite the latest favorable inflation figures.

Bond market developments

Long-term yields have declined across the region, with the most notable decreases in 10Y yields recorded in Hungary and Romania. In Romania, confidence is growing that a resolution to the political deadlock is on the horizon. As a result, Romania managed to sell more October 2029 bonds than initially planned. The parliamentary confidence vote is scheduled for October 20. Prime Minister-designate Luca Niculescu has submitted his proposed cabinet and governing program to Parliament, following an agreement in principle among the major political parties. Meanwhile, Hungary is awaiting the announcement of its 2027 budget deficit target. Market expectations broadly suggest that the deficit will be set at between 5.0% and 5.5% of GDP.

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