June’s inflation, stability of rates in Poland

The beginning of the week will be quite dynamic, with flash inflation releases in several CEE countries. In fact, June inflation numbers will be flowing throughout the week. On Monday, Croatia and Serbia will publish retail sales and industrial output growth in May. Serbia will also release its May trade balance. Later in the week, trade data will be published by Hungary and Slovenia. Hungary will also release industrial production in May at the end of the week. On Wednesday, Poland’s central bank is to hold a rate-setting meeting; we expect stability of rates. New growth and inflation projections will be released as well. Finally, Romania will release its unemployment rate and producer prices in the middle of the week.

FX market developments

Weakening of the US dollar against the euro (EURUSD at 1.17) translates into strengthening of the local currencies, the Hungarian forint and Polish zloty in particular. Both currencies strengthened roughly 0.5% against the euro. The EURRON is less affected, as local factors (quite disappointing extent of fiscal consolidation at this point) remain intact. This week, Poland’s central bank should keep its policy rate at 5.25%. Most of the policy-makers have sounded cautious, given the geopolitical tensions and inflationary risks stemming from higher oil prices. New projections of growth and inflation will be published. Inflation should fall toward the target within the projection horizon, opening a way for more rate cuts in the remainder of the year. Last week, the Hungarian and Czech central banks opted for stability of rates and the risks for such a scenario until the end of the year have increased lately.

Bond market developments

Last week, CEE government bonds benefited from weakening of the USD and decline of 10Y Treasury yields. In general, LCY 10Y government bond yields collapsed about 10-15bp w/w, with only ROMGBs a notable exception. It seems that investors are cautious regarding implementation risks of the new fiscal package, which is critical to avoiding a credit rating downgrade. The window for the Romanian government to present a credible fiscal consolidation plan is closing rapidly, especially as all three major rating agencies currently have Romania on a negative outlook, with the next round of reviews scheduled between August and October. This week, the debt auction calendar is relatively light, with only reopening of ROMG 2028 and a Hungarian T-bill auction announced so far.

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