Markets eye ECB amid contained CEE May inflation

This week, the release of the detailed May inflation data for several CEE countries, along with the ECB meeting, will be in focus. We expect no major surprises on the inflation front, as the May flash estimates already pointed to relatively benign price dynamics. In Hungary, inflation is expected to increase to 2.2%, from April’s 2.1%; Czech inflation should be confirmed at 2.1%, while Romania’s inflation is likely to edge slightly higher to 10.8%, from April’s 10.7%. The May reading may also mark this year’s inflation peak, unless the situation with energy prices deteriorates. The ECB meeting, taking place on Thursday, will be closely watched by both markets and regional central bankers, as any rate hike could increase pressure on CEE central banks to follow. At present, we do not see any central bank in the region as determined to hike, although the Czech National Bank, arguably the closest to such a move, is unlikely to act already at next week’s meeting. Several CEE countries will also publish April industrial output and trade data, with deficits expected to widen due to higher commodity import prices. In Romania, negotiations on the formation of a new technocratic government led by Eugen Tomac, a center-right politician and Member of the European Parliament, are expected to intensify. He must submit the cabinet line-up and governing program to the parliament by June 14. Meanwhile, the Serbian central bank will hold its MPC meeting on Thursday; we expect key rates to remain unchanged.

FX market developments

The Czech koruna strengthened below 24.200 at the end of last week, supported by surprisingly strong wage growth and rising expectations that the CNB may quickly follow the ECB in raising interest rates. Although the risk of a rate hike has increased, inflation remains contained, with core inflation still slightly below 3%. For now, it appears more likely that the CNB will open discussion on rate hikes at next week’s meeting without rushing to deliver one. In the meantime, the central bank has increased the countercyclical capital buffer, while the stronger koruna has also contributed to a tightening of monetary conditions, which the board already perceives as mildly restrictive. On the other hand, we see room for a rate reduction in Hungary as early as the June meeting, given the stronger exchange rate and a decline in the risk premium.

Bond market developments

Government bond yield curves moved slightly higher across the CEE region last week, with the exception of Romania. Romanian debt has been supported by the president’s nomination of Eugen Tomac as prime minister-designate to lead a technocratic government. Political negotiations have only just begun, so it remains uncertain whether the new prime minister will secure parliamentary backing; the vote is expected to take place in the second half of June. This week, Czechia will reopen CZGBs maturing in 2034, 2035, and 2037, while Romania will reopen ROMGBs maturing in 2027 and 2029. Slovenia and Hungary will issue T-bills, while Hungary and Poland will offer various bonds in their regular auctions.

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