Inflation getting close to the peak

This week, inflation numbers for July will be published in most of the CEE countries. In Czechia, Hungary and Serbia, we expect headline CPI to increase further, while in Romania, we believe that the peak was reached in June and inflation should ease in July. Other CEE countries should see the peak of inflation in the course of the third quarter. The Serbian central bank is to hold a rate setting meeting and we expect another 25bp hike so that the policy rate should reach 3%. Finally, industrial output growth and trade data for June will be published across the region. It will be interesting to see whether export activity was already affected in light of the slowing German economy.

FX market developments

The forint and the zloty strengthened further over the course of last week, with the former firming by 2.4% to just below 395 vs. EUR and the latter marking a milder move to 4.70 vs. EUR. Forint’s recent gains made it easier for the Hungarian central bank to keep its one-week deposit rate unchanged at 10.75%, as expected. In Poland, flash inflation for July remained at the 25-year high of 15.5% y/y, possibly raising chances the central bank may be nearing the peak of its tightening cycle. However, it is too early to tell yet and differences in opinions within the MPC remain. Last week’s meeting of the Romanian central bank brought a 75bp hike to 5.50%, with the credit facility rate, as the relevant operational policy instrument under tight liquidity management policy, reaching 6.50%. On the other hand, the Czech National Bank (under its new MPC composition) left its key rate unchanged at 7%. The CNB also decided it will continue to actively prevent significant fluctuations in the koruna via its FX interventions and temporarily moved the monetary policy horizon by 6 months to 18-24 months, which implies lower pressure on policy tightening. The koruna stands at 24.60 vs. EUR. Thursday brings the Serbian central bank meeting – we expect a 25bp hike to 3%, as global price pressures are still evident, and the peak of inflation remains ahead of us.

Bond market developments

Whereas the development at the short-end of the curve differed across CEE, yields at the long-end moved down by 3-19bp everywhere apart from Romania by early Friday. However, many later reversed the moves and only the Czech 10Y yield was down compared to the preceding week on Monday morning. The 10Y ROMGB yield remained the highest in the region, at 8.22%. Even though the Romanian yield curve was briefly inverted in late July, the 10Y-3Y spread is back to small, but positive figures. On the other hand, Czech, Hungarian and Polish yield curves remain inverted under the 10Y-2Y comparison. According to official ECB data, the central bank has used the flexibility in its first line of defence – reinvestment of the pandemic PEPP programme redemptions – to help peripheral countries. Net purchases of debt from Italy, Spain, Portugal and Greece totalled EUR 17.3bn through June to July, whereas holdings of German, French and Dutch bonds were reduced by EUR 18.9bn in the same time frame. Romania plans several auctions this week – from T-bills to bond auctions (with the maturities ranging from 2025 to 2032). T-bills will also be issued in Hungary and Czechia, and Czech 2031 bonds should also be offered this week.

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