Inflation takes centre stage

This week will be busy as we await a flood of data and one central bank meeting. The Serbian central bank will likely remain on hold and keep the key rate at 1% on Thursday. Inflation figures for July will be published in most of the region. Hungarian CPI is likely to have eased to 4.7% y/y, reflecting the higher base from last July. Czech consumer prices are expected to be up by 2.8% y/y as inflation remains high mainly due to sound domestic demand and tight labor market. Serbian inflation may have remained around the mid-part of the NBS' target band at 3% y/y and a similar pace can be expected in Slovakia, where tobacco and imputed rents remain significant contributors. Romanian inflation likely accelerated to 4.8% year-over-year, reflecting expected increases in electricity and gas prices. The Polish CPI print should be confirmed at 5% y/y. More interesting news from Poland will come regarding the flash GDP release. Strong real economy data and the base effect likely pushed 2Q21 GDP growth up to the vicinity of 10.7% y/y (2.3% q/q), while net exports probably remained a drag on growth. Moreover, industrial production figures for June will be published in Slovenia, Romania, and Slovakia. Robust double-digit growth of industry of around 10% may be expected, still affected by the base effect (though less so than before), but also some supply-side concerns and bottlenecks. June trade balance will be published in Romania, Slovakia, Slovenia, and Poland. On Friday, the S&P will review the Hungarian rating – no changes to the outlook or rating are anticipated.

FX market developments

CEE currencies benefited from higher interest rate expectations in CEE. The Hungarian forint continued to outperform its regional peers with the fastest speed of tightening in the pipeline. A new pledge from the CNB to deliver more rate increases in the coming months also helped the Czech koruna at the end of last week. Due to the uncertainty around the pandemic, we are not certain whether a 25bp hike will be delivered at each subsequent policy meeting, but if so, and if pandemic risks abate, the koruna can easily strengthen below 25 EURCZK. We plan to issue our new macro and market forecasts for Czechia at the beginning of September. The Croatian kuna also slightly appreciated last week, which can be attributed to the typical seasonal pattern. Depreciation pressure on the Romanian leu has also eased; the leu returned below 4.92 EURRON last week, supported by exports of agricultural crops as well as tight liquidity management from the central bank.

Bond market developments

10Y government bond yields remained flat or even edged slightly down last week in CEE, with the exception of Poland and Romania. In Romania, the yield curve steepened, due to underweighting of duration in ROMGBs by local investors ahead of the disclosure of the new NBR inflation forecast and July inflation, which should point to a higher inflation trajectory. Despite the very strong resistance of the NBP towards monetary tightening, the POLGB curve shifted up about 8bp w/w, as the pressure related to higher inflation is mounting, particularly given how seriously it has been taken by peer central banks. The more aggressive speed of tightening announced by the CNB has hardly caused any damage to CZGBs; the curve has flattened, as yields on short-term bonds (i.e. 1Y) moved up. At the end of this week, S&P should publish its sovereign rating on Hungary.

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