Inflation likely shifted into a higher gear in April

This week in CEE

This week is packed with interesting releases. Poland will reveal its flash GDP in 1Q21, which we see at -1.4% y/y. Although strict restrictions affected retail and services sectors for most of the quarter, the economy likely expanded by 1.1% on a quarterly basis. Inflation data for April will be finalized across the region as all countries apart from Slovenia and Poland, which have already done so, will publish their CPI prints. These are likely to show a noticeable increase in annual terms, pushed up by base effects from last year – rising as high as to 4.8% y/y in Hungary. Higher fuel prices spurred by last year’s low base on oil are to play an important part in the year-on-year inflation rates. Moreover, excise tax changes and correspondingly higher tobacco prices likely contributed to the increased inflationary pressures in Slovakia, Hungary and Romania. March industrial production growth could have shifted up to 9% y/y in Slovenia, 15.3% y/y in Romania and 21% y/y in Slovakia, driven by solid external demand (even amidst some supply-side disruptions) and strong base effects. The central bank meetings in Romania and Serbia are likely to keep the key rates unchanged at 1.25% and 1%, respectively. The Serbian central bank could leave its rate untouched throughout 2021. The Romanian central bank is ready to ensure the flexibility of its inflation target, which suggests, in our view, that it is likely to tolerate temporarily higher supply-driven inflation.

In the last week of April, the CEE Recovery Index marginally corrected, although it still remains close to recently observed highs. As restrictions for the retail sector have mostly been lifted across the CEE region, mobility to grocery and retail stores improved further. Mobility to grocery stores hit new record-high levels. On the other hand, mobility to the workplace and air pollution somewhat deteriorated at the end of the previous month. In the coming weeks, a slight revision of the Recovery Index cannot be ruled out, as electricity data has been unavailable since mid-April. The CEE Recovery Index suggests that the region is heading toward a strong recovery in 2Q21, and double-digit GDP growth dynamics are increasingly likely.

FX market developments

The US dollar depreciated sharply at the end of the week and the EURUSD moved above 1.21, as labor statistics for April came in below market expectations. CEE currencies benefited from the weaker dollar and appreciated. The Czech koruna was likely additionally supported by the central bank’s decision. Although the CNB surprisingly lowered its GDP growth forecast for 2021, the overall wording sounded hawkish. Thus, the koruna moved below 25.7 vs. the EUR. The Croatian kuna marginally strengthened, due to tourism inflows. The zloty appreciated strongly after the Supreme Court decision on CHF loans. The court stood by its previous opinion that the claims of the banks and consumers do not automatically lead to mutual compensation. In the court's view, the bank may demand repayment of the benefit from the moment the loan agreement has become permanently ineffective, which determines the running of the statute of limitations.

Bond market developments

CEE bond markets remained relatively stable last week; more interesting moves happened on the short end. Hawkish comments from the CNB triggered an upward shift (+20bp w/w/) in FRA9x12, which landed around 1.15%, well above the key rate (0.25%). We expect the CNB to deliver the first hike in August and another in November, but cannot rule out that policy normalization could already start at the end of June (at the next policy meeting). This week, the National Bank of Poland will hold its first of two QE auctions scheduled for May. In its last operation conducted in April, it bought government securities for PLN 5bn. Moreover, BGK is going to place at least PLN 1bn of bonds. Czechia, Hungary, Romania and Slovenia will be selling T-bills this week. On top of that, a broad variety of bonds will be on offer – ROMGBs 2028, 2030, and 2036, CZGBs 2031, 2032 and 2040, and some HGBs and SLOVGBs.

In case you missed

CEE: March retail sales above our expectations in Hungary, Romania and Slovakia.

RS: 1Q21 GDP growth surprised to upside. We revised our FY21 GDP forecast up by 1pp to 6%.

HU: Industry accelerated in March due to base effect.

CZ: Central bank kept policy rate stable at 0.25%. Industrial production for March confirmed economic recovery.

SK: Exports reached record figure in March.

PL: National Bank of Poland kept key rate unchanged at 0.1%.

North Macedonia: Fitch affirmed the rating at ‘BB+’ with negative outlook.

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