Increased inflationary pressure in June

Recovery Index

At the beginning of July, our composite CEE Recovery Index showed further improvement towards 0.8, meaning that 4/5 of the gap between pre-crisis normal and the bottom of the crisis has already been closed. Mobility to retail stores is already back to normal, while mobility to work, electricity consumption, and capacity utilization in automotive still needs more time before it is fully restored.

FX market developments

The CEE FX market entered summer mood, with limited volatility and stable currencies. Local currencies mostly seem to be focusing on global news regarding the development of the pandemic and changes in market sentiment. We think that space for further depreciation of the Hungarian forint is limited, as the markets have accepted deeper monetary easing than will likely take place at the next rate-setting meeting in July. Higher than expected inflation readings for June in Hungary and Czechia did not impact exchange rates. However, it remains to be seen whether the Czech National Bank could react earlier to increased inflationary pressure and tighten monetary conditions earlier than expected. However, the decision of the Eurogroup to allow Croatia to enter the ERM-II was the highlight of the week. The central parity has been set at 7.5345 and we expect Croatia to remain in ERM-II for at least two years before the final assessment of the Maastricht criteria is made and the country adopts the euro.

Bond market developments

Romania tapped the international bond market and issued two USD-denominated papers (USD 1.3bn in 10Y bond and USD 2bn in 30Y bond). According to our forecast, 72% of this year's gross borrowing needs have been already been covered. However, Romania will have to maintain the high issuance pace in the coming months and will most likely focus on local issuance, given the recent increased supply on the international market. The National Bank of Poland held another QE operation and bought PLN 5.14bn in Treasuries and state-guaranteed papers. The total volume of QE in Poland has already reached PLN 101.4bn (4.5% of last year's GDP). In our view, the NBP could still buy an additional PLN 40-50bn in bonds by the end of the year, conditional on no substantial increase in the current fiscal stimulus program.

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