This week, there are many economic releases scheduled in the region. Let’s begin with July’s retail sales and industrial production in a number of countries. On Monday morning, retail sales growth was published in Hungary, Romania and Slovakia, and the growth dynamics moderated compared to June’s numbers. A similar development is expected in Czechia later this week. Industry across the region is also likely to show some deterioration, as indicated by the weakening market sentiment. There will also be two central bank rate setting meetings taking place. In Serbia, we expect another 25bp hike, so that the policy rate should reach 3.25% after the meeting. In Poland, the rate should also increase by at least 25bp in September. A higher rate increase cannot be ruled out, given the further rise of inflation in August. The monetary tightening cycle is coming to an end in Poland, however, as suggested by numerous comments from MPC members. Finally, the 2Q22 GDP structure will be published in Romania and Slovakia alongside August inflation in Hungary, where further increases are broadly expected.
FX market developments
CEE currencies firmed across the board last week. Forint marked the strongest move, appreciating by 2.9% compared to last Friday and ending the week just below 400 vs. EUR. The Hungarian central bank raised both its key policy rate and the one-week deposit rate by 100bp to 11.75%, as expected. Moreover, to enhance monetary transmission, it added three measures which will support the development of short-term financial market rates consistently with the key policy stance by draining interbank liquidity from this autumn. Easing of gas prices and signs of a possible approval of Next Generation EU funds by the European Commission by end-December also helped. The zloty and the koruna also firmed towards 4.71 and 24.47 vs. EUR, respectively. This week, the ECB as well as the Serbian and Polish central bank meetings will be in the spotlight. We expect the NBS to keep its course of moderate tightening and deliver a 25bp hike to 3.25% in Serbia. In Poland, the market anticipates a 25bp increase to 6.75%, but recent comments from NBP policymakers leave the room open for anything between stability and a larger than 25bp hike.
Bond market developments
Last week, CEE government bond yields showed a mixed development. While yields on 10Y HGBs drifted up 20bp w/w, getting closer to this year’s high, Romanian bonds rallied, with the 10Y yield falling 20bp w/w. The spread between 10Y HGBs and ROMGBs has widened to its new high (110bp) and far exceeds its average level from this year (-50bp). There are a couple of reasons for such a divergence. First, it seems that the NBR did not need to intervene on the FX market, as the RON was appreciating last week. A couple of investment houses and index trackers started to rebuild their ROMGB positions, while Hungary, due to the unclear situation surrounding its access to EU funds and rule of law issues, remains uninvestable. Moreover, the latest decision of the central bank contributed to the most recent yield move; on top of a 100bp rate hike, the central bank announced its intention to drain excess liquidity from the market via longer instruments (discount bills). This has also been reflected in a more pronounced increase of 3Y yields (+80bp w/w) compared to the long end. This week, there are plenty of T-bond and T-bill auctions scheduled in CEE, with Romania to be the most active.
