Stable monetary policy in Czechia, Poland and Romania

This week in CEE

This week is all about central bank meetings, as three of them – the Czech National Bank, Polish MPC and Romanian central bank – are due to decide on interest rates. In all of these countries, the inflation rate recently reached or went outside the upper bound of inflation targets. Despite elevated inflationary pressure, monetary policy should not change in any of the three countries. In Czechia, those supporting interest rate hikes are the most vocal, but they remain in the minority. In Poland, the rate hike motion failed to find a majority at the last meeting. Rate-setters in both central banks believe that inflation should ease throughout the year, therefore stability of rates is the proper course for monetary policy. In Romania, the dovish stance of the ECB also plays a role in keeping policy rates flat. We will also see December retail sales and industrial output growth in Czechia, Hungary, Slovakia and Romania, which should pretty accurately indicate where GDP growth is likely to land in the last quarter of 2019.

FX market developments

Regional currencies mostly weakened last week, amid increasing international tensions due to China's coronavirus. The movements were, however, also driven by local factors. The CZK fell somewhat due to lowered expectations of monetary tightening. The EURCZK is now in line with our quarter-end forecast. The Polish zloty, which fell the most last week, was not helped by judiciary turmoil. Still, the zloty also fell close to our forecast. The forint, which is still the weakest and most volatile this year in CEE, got a boost from central bankers warning the market of an expected decline in surplus liquidity. The outlook is still uncertain for the HUF, however. The Romanian leu remains largely unaffected by political news.

Bond market developments

German Bund yields continued to decline last week by about 8bp, also dragging most CEE yields lower. Hungary showed considerable yield volatility. This may have been in connection with central banker comments that warned of a strong decline in liquidity in the upcoming weeks. Czech CZK yields have fallen considerably, illustrating the declining likelihood of monetary tightening. Romanian yields stayed relatively calm amid increasing chances of early elections, which could pave the way for much needed fiscal tightening. The parliament is expected to decide on date of the noconfidence vote in the second half of this week.

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