Inflation and Serbia’s central bank

Inflation in November will be released in Hungary, Romania and Serbia. So far, in other CEE countries, inflation tended to surprise to the downside. In Serbia, the central bank holds a rate-setting meeting on Thursday and we expect no change in the policy rate. Other than that, we will see the performance of industry in October in Slovakia and Slovenia. Trade data is due in Slovakia and Slovenia, while Croatia will release producer prices.

FX market developments

The Czech koruna and Hungarian forint have weakened against the euro while the Polish zloty has held up relatively stable. In Czechia, the FX market was influenced by November’s inflation, which surprised to the downside at the end of the week. While headline CPI arrived at 2.1% y/y in November, real wage growth at 4.5% is solid and considered pro-inflationary by the central bank. Poland’s central bank lowered the key policy rate to 4% in December as inflation eased more than expected in November. Governor Glapinski suggested a “wait-and-see” mode for the time being. We see the terminal rate at 3.5% with risks to the downside. This week, Serbia is holding a rate-setting meeting, but we do not expect any change in the key policy rate this year. The main event is taking place on global markets, which may influence market developments in the region. The US Fed holds a rate-setting meeting and an interest rate cut is broadly expected.

Bond market developments

Long-term government bond yields edged higher across major markets last week, with German Bunds and US Treasuries rising by roughly 10bp w/w in the 5-10Y segment. Our colleagues from Major Market Research have revised their yield forecasts slightly upward for next year, citing relatively accommodative monetary and fiscal policies in the US, which could keep inflation elevated over the medium term. Bond markets in CEE showed little reaction to global yield movements. In contrast, 10Y HGB yields fell by about 10bp w/w after the governor signaled that inflation may ease soon. Additionally, the government announced that a substantial share of FX funding over the next few years will come from SAFE loans, which should reduce foreign issuance and lower borrowing costs. This week, Romania will reopen ROMGBs maturing in 2028, 2032 and 2035; Czechia will reopen CZGBs 2029 and 2035; and Poland will offer a range of bonds. Both Czechia and Hungary plan to sell T-bills as well.

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