Slightly weaker growth and lower inflation

In the new outlook for the region, we revised the GDP growth forecast for 2024 down in the following countries: in Czechia, to 1.0%, from 1.7%; in Hungary, to 2%, from 3.2%; and in Romania, to 2.6%, from 3.3%. On the other hand, in Croatia, the growth forecast got bumped up to 3.1%, owing to a stronger carry-over effect and further improving private consumption outlook. We see the CEE8 average GDP growth at 2.4% in 2024. Further, we revised the inflation forecast downward in all CEE countries. Average inflation in 2024, compared to the previous year, is expected to be lower as demand-side pressure (weak economic growth) and supply-side factors (such as food price devleopment) favor downward trend. Furthermore, headline inflation should fall toward the central bank’s target in 2024 in several CEE countries.

As far as monetary policy is concerned, Czechia surpsingly accelerated monetary easing in February, but the recent weakening of Czech koruna may hold off bigger interest rate cuts. We keep seeing the key policy rate at 4.0% at the end of the year. Hungary lowered the policy rate to 9.0% at the last meeting and we expect it to fall to 6.5% by mid-2024 and remain unchanged afterwards. Serbia, on the other hand, is likely to delay the beginning of monetary easing until the major central banks make the move and cut interest rates. Romania should begin with monetary easing in the second quarter of 2024 and May is our baseline scenario fir the first rate cut. Poland may keep the policy rate flat at 5.75% throughout 2024 after frontloading a 100 basis point cut in the second half of 2023.

Yields in CEE have moved north since beginning of year everywhere but Czechia, where sizeable monetary easing seems to dominate bond market development. Furthermore, spread versus German Bunds compressed everywhere but Slovakia.At the end of 2023, Fitch downgraded Slovakia's rating by one notch in response to the worsened fiscal stance and neglect of structural challenges. Other rating agencies may follow. Spreads widened to 120-130 basis points recently.

Since the beginning of the year, the Czech koruna and Hungarian forint have depreciated against the euro, while the Polish zloty, on the contrary, has strengthened. Poland is benefiting from a change of government and the unlocking of EU funds, as evidenced by the EURPLN moving down.In Czechia and Hungary, the markets are keeping a close eye on the comments of central bankers to see whether weaker currencies could not be mentioned as a hurdle for the continuation of monetary easing at the current pace. At the top of that, in Hungary, increased political noise and ongoing tensions between the government and central bank do not support the Hungarian forint.

Political developments in the region get a special space in the report. We not only discuss the upcoming elections, but also take a closer look what has been going on in Hungary, Poland and Slovakia recently.

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