Inflation and Serbia’s central bank

Inflation data will be published in several CEE countries. Hungary and Romania will show May’s inflation for the first time, while in other countries, flash estimates had been released already. Serbia’s central bank will hold a rate setting meeting on Thursday. The performance of industry in April will be reported in Slovenia, Slovakia and Romania. Trade data is due in Romania and Poland. Finally, Slovakia will publish wage growth in industry and Croatia will release producer prices. As far as other events are concerned, we expect to know who the next prime minister of Romania is, as time is running out to present a credible fiscal consolidation plan. On Wednesday, confidence vote will take place in Poland and we recognize the risks associated with it. On Friday, after market close, Moody’s is expected to review the outlook of Slovakia. 

FX market developments

FX market development has been quite divergent in CEE over the last week. While the Czech koruna and Hungarian forint appreciated against the euro, the Polish zloty has weakened. There are a couple of local factors in play. First, rising political instability after Nawrocki’s victory in the presidential election prompted Prime Minister Tusk's call for a vote of confidence. Second, there is the hawkish tone of the central bank in Poland. Governor Glapinski avoided giving any guidance about future monetary policy. Other central bankers (Kotecki and Wnorowski) joined Glapinski in expressing cautiousness (due to the fiscal outlook and political instability), although both policy-makers would see a 50-basis point cut this year as optimal. In Serbia, we see the interest rate decision as a close call between stability of rates and an interest rate cut. If monetary easing does not begin this week, it should start in July. The ECB monetary policy has always been an important factor for Serbia’s central bank. It seems there is more clarity that, for now, the deposit rate is likely to stay at 2% unless the economic outlook in the Eurozone deteriorates more visibly.

Bond market developments

Last week, 10Y yields in CEE government bond markets rose by approximately 10bp w/w, as several central banks withdrew forward guidance on upcoming rate cuts. The most notable shift occurred in Poland, where markets had previously priced in aggressive future rate cuts. As a result, 2x5 FRAs increased by 40bp m/m and 10-year yields jumped by 15bp w/w. In Czechia, a higher-than-expected May inflation reading, solid 1Q GDP growth, and rapid wage increases provide little justification for hasty rate cuts. We expect the next rate move to occur in November. Romania’s bond market has seen improvement, supported by the central bank’s commitment to provide liquidity under favorable conditions (at the repo rate). Additionally, political developments have progressed, with the new president making headway in appointing a new prime minister - an announcement that could come as early as this week. This week, Czechia, Hungary, and Slovenia are scheduled to issue T-bills. Czechia will also offer a floating-rate bond. Romania plans to raise RON 1.4bn through the reopening of ROMGB 2028, 2030, and 2032 issues, while Poland will offer a range of bonds.

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