Tighter is the keyword for monetary policy

A busy week awaits, as three regional central banks are due to review their monetary policy. The Polish central bank starts the string of meetings with its sitting on Tuesday which should bring another hike of 50bp, thus raising the key rate to 2.75%. Romanian NBR follows the next day and the bank is likely to stick to its gradual pace of 25bp increases. We expect this week’s rate to be raised to 2.25% and then further rate hikes of 25bp each are foreseen afterward, with the terminal rate for the cycle being reached at 3% by mid-2022. Hence, the credit facility rate should reach 4% by mid-2022, and likely become the relevant operational instrument. Serbian central bank, which meets on Thursday, is anticipated to stick to its 1% key rate as long as the reverse repo rate is below that level (currently, the repo rate stands at 0.71%). Given the pace of recent repo rate hikes, it may match the key rate at the end of March or in early April; thus we expect the first hike in April or May at the latest. Inflation prints for January will be released in Slovenia and Hungary. We expect inflation to have remained elevated at 5% y/y and 7.5% y/y in the two countries, respectively, with strong repricing behavior likely at play, too. Moreover, industrial production prints for December are due for Slovakia, Czechia and Slovenia. With some potential easing of supply-side issues at year-end, the industry may have grown by 1.3-2% year-on-year in Czechia and Slovakia, and by a brisk 6% y/y in Slovenia.

FX market developments

The EURUSD has been quite volatile over the past two weeks. While the statements by Fed Chairman Powell at the end of January increased the risks of rapid monetary tightening during the coming months, which pushed the EURUSD toward 1.11, the press conference of President Lagarde following the ECB meeting just over a week later and the ECB’s concern about the renewed rise in inflation weighed on the US dollar as it moved to 1.1450 vs. the EUR. The strong swings in the EURUSD affected CEE currencies as well. The Hungarian forint and the Polish zloty continued to appreciate and moved to 354 vs. the EUR and 4.54 vs. the EUR, respectively. Ahead of last week’s rate-setting meeting in Czechia, the koruna briefly touched 24.10 vs. EUR but pared the gains as the central bank acted in line with expectations and raised the key rate by 75bp to 4.5%. In our view, the current level of the EURCZK corresponds to fundamentals and we expect the currency to fluctuate around 24.40 vs. the EUR until the end of the year. This week, three central banks hold their rate-setting meetings. While the National Bank of Serbia is expected to remain on hold, the National Bank of Poland and the National Bank of Romania will raise their key rates once again. We foresee a 50bp increase to 2.75% in Poland and a milder hike by 25bp to 2.25% in Romania. Although the NBS will most likely keep the key rate unchanged this week, we expect the first rate hike to be delivered in April-May as the central bank will run out of ammunition on the repo rate, which currently stands at 0.71%. We see the key rate at 2.0% by year-end in Serbia.

Bond market developments

The ECB meeting and the statements by President Lagarde during the press conference were ‘the’ event of last week. As President Lagarde at least put the tightening of monetary policy this year into the realm of possibility, the German Bund curve shifted considerably up by about 25bp. While the 2Y yield moved to -0.28%, the 10Y yield increased to almost 0.2%, the highest level since the beginning of 2019. Hence the spreads against 10Y Bund narrowed considerably by about 30-50bp in Czechia to 295bp, in Poland to 365bp and in Hungary to 466bp. In Romania, the long end somewhat underperformed as the 10Y yield climbed above 5.5% following the announcement of the issuance calendar for February and last week’s bond auction. As a result, the spread between 10Y ROMGB and 10Y German Bund remained broadly stable at about 540bp.

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