Inflation continuing its upward drive

Inflation figures across the region will be in the spotlight this week as many countries will publish their August prints. We expect consumer price growth to have accelerated somewhat all over CEE, with CPI prints ranging between 12.6% y/y in Croatia to 17.7% y/y in Czechia. The key drivers should remain the same – namely, food and energy prices; but domestic inflationary pressures are also likely to have remained a visible contributor to consumer price growth. Price pressures remain elevated also on the production side and we expect this trend to be confirmed in Czechia for its August PPI. Moreover, Romania will publish its industrial production figure for July which should show a decline of 5% y/y, as suggested by ESI manufacturing survey. Poland will release its trade balance for July, whereas Romania should publish the current account balance for the same month. Finally, July wage growth will be out in Romania and Slovakia.

FX market developments

Last week was all about the central banks. The ECB raised all three key interest rates by 75bp, bringing the deposit rate to 0.75% and the main refinancing rate to 1.25%. The move is seen as frontloading the shift to monetary policy that will ensure a return of inflation to the 2% target. Further rate hikes are to be expected, but data dependent. The ECB also suspended the 2- tier interest rate for deposits at the ECB, and revised its GDP forecasts downwards and inflation ones upwards. National Bank of Poland raised its key rate by 25bp to 6.75%, as expected. Of interest was the comment from the central bank that a stronger zloty would help lower inflation and that it may intervene in the FX market. Governor Glapinski said the NBP will consider no hike or a 25bp increase in October. He also echoed his earlier view that if inflation eases, cuts could begin in 4Q23. The Serbian central bank opted for a 50bp hike, lifting the key rate to 3.5%. We expect to see the key rate reach 4.5% by year-end, with more hikes in 1Q23. The euro has firmed above 1 vs. USD. The zloty also appreciated mildly to 4.70 vs. EUR, whereas the move was more pronounced for the forint that firmed by 1.6% w/w to 396 vs. EUR on Friday (but lost a bit early today). The HUF’s move reflects, inter alia, news that the Hungarian Prime Minister signed a decree to establish an independent anti-corruption agency aimed at safeguarding EU money. This is a key step to unfreezing EU funds for the country. Moreover, there is a non-rate setting meeting of the Hungarian MNB on Tuesday, which could provide some more details on already announced liquidity measures.

Bond market developments

In general, CEE bond markets followed the increases in yields on major markets, which came along with the 75bp rate hike delivered by the ECB last week. CZGBs and POLGBs were rather outliers, as their yields stagnated or even declined. The latter was caused by fading monetary tightening in Poland, as was apparent from the modest 25bp rate hike and indications that a hike at the October meeting cannot be taken for granted. Conversely, 10Y yields on HGBs jumped another 44bp w/w, with a more pronounced increase in the 1-3Y segment (70-100bp w/w). Investors are eagerly awaiting more details from the central bank on discount bills and long-term deposit increases, with the former being an attractive alternative to short-term government securities. This week, Czechia, Hungary, Romania and Slovakia will issue their T-bills. On top of that, Romania will reopen ROMGBs 2027 and 2036, Czechia will issue two T-bonds (fixed coupon & floater) and Hungary will conduct its regular set of auctions.

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