More tightening is on its way in Hungary

This week’s defining event will be the Hungarian central bank meeting on Tuesday. Given elevated inflation that even surprised on the upside in December as well as upside risks to the CPI development in the near term, more tightening is warranted. The MNB is likely to raise the key rate by 30bps to 2.7% and stress further tightening to come. The one-week deposit facility rate on the weekly tender, which has become the effective rate, will also most probably increase by 30bps to 4.3% on Thursday, thus keeping the difference between the two rates at 160bp. Furthermore, several monthly indicators will be released across CEE. December retail sales likely marked brisk rates of growth, as we expect them in the double-digit region in Croatia, Poland and Slovenia. In fact, Slovenian retail trade may have risen by 30% y/y as there is a strong base effect at play from the lockdown in late 2020. Unemployment probably remained unchanged in both Hungary and Poland at year-end, as unemployment rates should stand at 3.7% in the former and 5.4% in the latter (domestic measure). Slovak producer prices are thought to stress the high inflationary pressures as we expect them to come in at just over 14% y/y for December. Finally, Poland will be the first country in the region to release FY21 GDP growth and we expect it to land at 5.5% marking a strong post-crisis recovery. Upside surprise cannot be ruled out, due to unexpectedly solid performance of economy in last quarter of 2021.

FX market developments

Despite increased global volatility, the VIX index has risen sharply since the start of the year, while CEE currencies are extending their gains, as they continue to benefit from the stabilization of the US dollar as well as regional monetary policy. While the Hungarian forint gained as much as 3.4% against the euro in the first three weeks of January, investors are currently in waitand- see mode ahead of this week’s rate setting meeting. Although the uncertainty around the upcoming decision is high, we expect the Hungarian central bank to raise the key rate by 30bp to 2.7%, while keeping the interest rate corridor unchanged. However, the weekly tender is more important, and it seems likely that, after a three-week pause, the MNB will opt for a 30bp increase of the one-week depo rate to 4.3%. The EURCZK hit a new 10-year high just shy of 24.20 on the back of hawkish communication from the central bank and improved sentiment. Although the koruna continues to strengthen, there have been no indications so far from the central bank that the appreciation could offset some of the future rate hikes. The zloty is holding around a 4-month high at 4.53 vs. the EUR, while other CEE currencies remained broadly unchanged.

Bond market developments

Government bond yields and spreads on Eurobonds in CEE somewhat increased in a w/w comparison, despite a strong rally in the second half of last week. Poland was the only outlier, as the yield curve shifted down 15-20bp, supported by dovish comments from the new MPC candidate. Romania successfully placed its first dual tranche (5Y and 10Y) of Eurobonds this year, raising USD 2.41bn ahead of a maturing USD 2bn issue, which is due on February 7. The total demand stood at USD 4.6bn. There is still a long way to go, as the government plans to borrow EUR 10bn on international markets in total this year. CEE governments will continue in their local heavy issuance this week as well. Czechia will reopen CZGBs 2029, 2032, 2037, Poland will sell POLGBs 2024, 2027, 2032, and 2026, 2031 floaters, Romania will reopen ROMGBs 2024, 2029, and Serbia will sell 2024 bonds. On top of that, Hungary and Czechia will issue T-bills.

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