Mixed inflation figures in August

On the radar

• Serbian central bank lowered the key interest rate to 5.75% on Thursday.

• The inflation rate in Serbia in August remained at 4.3% y/y.

• Industrial output growth surprised to the downside in Romania declining by -3.9% y/y in August.

• Inflation rate in Slovakia landed at 2.8% y/y.

• Poland will release final inflation for August at 10 AM CET.

Economic developments

August’s headline inflation numbers were mixed across the region. In Czechia and in Serbia, inflation rate remained flat compared to July (2.2% y/y and 4.3% y/y). Compared to expectations, however, such development was a surprise to the upside that may result in more cautious approach of the Czech central bankers regarding further rate cuts. In Hungary and Romania, on the other hand, inflation eased. In both countries such development translates into comfort for the central banks to ease monetary conditions further. Finally, in Slovakia, inflation rate increased to 2.8% y/y from 2.6% in July. As for the outlook, Czechia, Hungary, Poland and Slovakia are expected to see headline inflation climbing further in the remainder of the year. Such a development is driven by statistical effects as well as regulatory adjustments. On the other hand, in Romania and Serbia, we should see inflation falling further in the remainder of the year. In 2025, inflation is expected to ease further. At this point, the downside risks to the growth are mounting (Germany‘s weakness, fiscal consolidation in CEE). If they materialize, they will be disinflationary. On the other hand, there are upside risks stemming from pending adjustment of energy prices (Slovakia) and possible tax increases within fiscal consolidation plans.

Market developments

Following the pause in August, the National Bank in Serbia decided to continue the cutting cycle, lowering the key rate by 25bp to 5.75%. Inflation has been moving inside the target band since May with a high likelihood of further easing, as well as the deflationary effects of past restrictive monetary measures. Going forward we expect the Serbian central bank to cut by an additional 25bps by year-end, which would set the key rate to 5.50%. In 2025, we expect the central bank to deliver another 100bps in cuts. On the core markets, the ECB Governing Council decided to cut the deposit rate by 25 basis points to 3.50%. The ECB economists' new forecasts showed no change in the inflation forecast compared to June. However, the core inflation forecasts for 2024 and 2025 were raised slightly, due to higher-than-expected inflation in the service sector. The markets showed no major adjustments on Thursday with CEE currencies being marginally weaker against the euro this week and long term bond yields slightly lower across the region.

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