Apart from the fresh winter air, the upcoming days will bring a string of inflation data and two monetary policy meetings in the CEE region. Given inflation running way above the target and fiscal consolidation progressing at a slow pace, we expect the Romanian central bank to accelerate its hiking cycle and catch up with CEE peers by delivering a 50bp key rate hike to 2.25% today. It may also widen its rate corridor to 100bp, lifting the credit facility rate to 3.25%. On the other hand, Thursday’s meeting of the Serbian central bank should leave its key rate untouched at 1% as it focuses more on the repo rate for now. Inflation is likely to have closed the year at an elevated level. Whereas further moderate acceleration is expected in Czechia, Serbia and Slovakia; Romanian and Hungarian consumer price growth likely eased at year-end. December CPI prints in Romania and Hungary are expected close to 7.1% y/y, supported by government subsidies for natural gas and electricity prices in the former, and a government cap on fuel prices in the latter. Serbian inflation may land at 7.6% y/y, just above its November value. Czech and Slovak inflation rates are likely to have sped up to 6.3% and 5.9% in year-over-year terms, respectively, with further acceleration likely in the new year on the back of energy price increases and possible upside risks from food prices. Moreover, we will see the November industrial production prints for Romania, Slovenia and Slovakia. These are likely to show a diverse development – with Slovenia sticking to a robust pace of around 5% y/y, Slovakia marking a mild 1% y/y growth and Romania improving its October performance but still clocking in a fall of 5.1% y/y.
FX market developments
CEE currencies started the new year with solid strengthening, supported by stabilization of the US dollar and further tightening of monetary conditions by regional central banks. The Hungarian forint strengthened by 2.4% YTD and moved toward 359 vs. the EUR. The Czech koruna appreciated by 1.2% YTD, extending its gains following the December rate hike. The bigger than expected rate increase delivered by the Czech National Bank in December and hawkish market expectations pushed the EURCZK to 24.50. While some market participants see the CNB raising the key rate toward 5%, we are more cautious and therefore expect some correction for the CZK. Despite another negative inflation surprise, the Polish zloty followed regional peers and moved to 4.55 vs. the EUR.
Bond market developments
CEE LCY curves have shifted up considerably since the start of the year, with the 10Y yield increasing by 20-30bp in Czechia, Hungary, Poland and Romania. Part of the move can be attributed to core market developments, as the 10Y German Bund went up toward -0.05%. Nevertheless, spreads against the 10Y Bund widened significantly and stand well above recently observed levels. In fact, in Czechia, the spread vs. the 10Y Bund reached a new all-time high at 310bp. This week, two regional central banks will hold their rate setting meetings. We expect the National Bank of Romania to align with its peers and raise the key rate by 50bp to 2.25%, as well as widen the standing facility corridor. The National Bank of Serbia should keep the key rate stable at 1.0%, as it controls market liquidity via repo operations; as long as the repo rate (at 0.5%) remains below the key rate, the NBS should remain on hold. Moreover, the Hungarian central bank holds a non-rate setting meeting this week and changes in the interest rate corridor could be announced.
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