Monetary tightening in the pipeline

This week, there are central bank meetings in Poland, Romania and Serbia. In Romania, we expect to see a 50bp hike and the key policy rate to be raised to 3.00%. The credit facility rate, which remains the relevant operational policy instrument under the tight liquidity management policy, should reach 4.00%. Looking ahead, we await two more 25bp hikes and the key policy rate to be at 3.50% at the end of the tightening cycle. In Serbia, we expect monetary tightening to begin with a 25bp or 50bp hike of the main policy rate. In Poland, the market expects another 50bp hike at the upcoming meeting, as inflation remains elevated (10.9% y/y in March). Apart from central banks, industrial production and retail sales growth will be published in Czechia, Hungary, Romania and Slovakia. In all countries, February footprints should remain strong, supported by the base effect from the previous year. In Hungary, the inflation rate will also be released. We expect it to edge higher to 8.8% y/y in March. On Sunday, there were elections in Hungary and Serbia. In Hungary, Prime Minister Viktor Orban’s Fidesz party has won Hungary’s parliamentary election gathering 53% of the vote. Fidesz party will have 135 seats in parliament, two more than the supermajority. The united opposition alliance won just 34.6% of the votes, enough for 57 seats out of 199. Serbian President Aleksandar Vucic won a second term in office securing 60% of the vote in the presidential contest. The Progressive Party-led bloc won about 44% of the vote, while the opposition parties took 12.5%, the figures showed.

FX market developments

CEE currencies strengthened whereas the US dollar weakened over the past week as risk sentiment got a boost from Russia-Ukraine talks that brought prospects of scaling down the war in Ukraine – though concerns remain. Polish zloty ended the week close to 4.64 vs. EUR, ahead of this week’s central bank meeting where the market expects another 50bp rate hike to 4%. Moreover, this week brings the Serbian and Romanian central bank meetings, too. We expect the NBR to hike its key policy rate by 50bp to 3%, with the Lombard rate as the relevant operational policy instrument climbing to 4%. There could be another two 25bp hikes by mid-year. The Serbian central bank is expected to start its hiking cycle, with a 25bp increase to 1.25%, but risks to the upside remain as they are behind the curve. Following the 50bp key rate hike to 5% in Czechia, the koruna gained some ground and ended the week close to 24.40 vs. EUR. Altogether, due to the current hawkish communication of the CNB, we expect another hike in May, but only by 25bp to 5.25%. With a non-negligible risk of stagflation this year and the expected rapid slowdown in inflation at the turn of 2022 and 2023, we think the CNB will start lowering rates already in 4Q22 and pencil in a cut for November. The Hungarian central bank kept its one-week depo rate at 6.15% last week, as the forint marked an impressive rally earlier, relieving the pressure on the MNB to tighten its stance straightaway. We expect more tightening to come, as the two rates should gradually converge at over 7% in early summer. Moreover, the ECB will launch a EUR 10bn liquidity swap line with Poland and renew the existing repo line with Hungary (EUR 4bn line established earlier in the pandemic) until January 15, 2023. These should help ease potential stress stemming from the war in Ukraine.

Bond market developments

After weeks of heavy turbulence, the last week brought some relief to the CEE bond market. Despite the very likely continuation of monetary tightening in the region, 10Y yields experienced a 25-35bp w/w correction. Thus, the ROMGB yield curve slightly flattened, while the POLGB, HBG and CZGB yield curves became even more inverted. The NBR continues to buy a tiny amount of ROMGBs in order to balance the market and restore RON liquidity (reduced by FX interventions), which may translate into higher demand at bond auctions. The liquidity surplus has been reduced on the dinar market, resulting in lower demand for RSD bonds and a spike in government bond yields (10Y @ 6%). The Serbian government may be looking at foreign issuance or a loan, depending on market conditions. This week, Czechia will reopen CZGBs 2025, 2035 and 2031 floaters and Slovakia will reopen SLOVGB 2068. Czechia and Hungary also plan to issue T-bills.

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