Central banks must reflect Czechia’s bold move
A very busy week awaits you in the EEC. Three regional central banks will take center stage. Romania’s central bank will start with its meeting on Tuesday, where it is expected to keep its key rate at 1.25%, citing the lack of clarity linked to the pandemic (with the fourth COVID wave in full swing). In addition, political uncertainty remains, the vote of no confidence being scheduled for the same day. However, once that is settled, a hike in November is expected to follow, as suggested by mounting domestic inflationary pressures, weak fiscal adjustment, currency weakness, and a narrowing of the real interest rate differential against US dollars. peers in a context of divergent external position. The surprising 75bp rate hike by the Czech National Bank last week puts the Polish central bank in a less comfortable position. While we don’t expect any 0.1% change in the key rate at this time, a November hike is back on the table as September’s flash inflation climbed to 5.8% yoy. The Serbian central bank meeting on Thursday is expected to confirm the key rate at 1%, with core inflation remaining low and stable. In addition, September inflation will be published in Hungary where it could have risen to 5.4% yoy, thanks to an unfavorable base effect and higher fuel prices. Czech and Hungarian industrial production impressions for August are expected to reflect supply chain issues and an unfavorable base effect, slowing to 2.3% and 4% year-on-year, respectively. Finally, retail sales data for August will be published in several CEECs. These should maintain solid but divergent growth rates – with some moderation expected in Romania and Hungary, compared to an acceleration in Slovakia and the Czech Republic.
Evolution of the foreign exchange market
As the US dollar extended its gains and EURUSD fell below 1.16, the highest level since late July 2020, EEC currencies were mixed. The Czech koruna benefited from the unprecedented move by the central bank, as the key rate was raised 75bp to 1.5%, and appreciated to 25.3 against the euro. We expect the CNB to continue its monetary tightening through the remainder of the year, subject to exchange rate developments. Elsewhere, the Polish zloty strengthened, following the minutes of the September rate-setting meeting and the surprise rising inflation in September, which could have increased the odds of a rate hike. from November. If this week’s MPC meeting were to disappoint those expectations, the Polish zloty could depreciate beyond 4.60 against the euro. In addition, we have revised our year-end EURHUF forecast to 355, taking into account increased global risk aversion, a weaker-than-expected rate hike as well as end-of-quarter market turmoil. swaps.
Evolution of the bond market
Last week we saw a fairly substantial increase in weight in yields on 10-year LCY government bonds in the EEC, ranging from 10 to 35 bps. The increase was purely due to local factors. The ROMGBs have suffered from the deepening political crisis, as the vote of confidence against the government scheduled for Tuesday is likely to succeed. Despite the surprisingly high rate hike (+75bp) delivered by the CNB, 10-year CZGB yields only increased by 10bp w / w. The rise mainly affected the short end of the CZGB yield curve. Clearly, the market believes that frontloading increases could help control inflation over the medium term. We have revised our call for the interest rate path and see the policy rate at 2% in December, peaking at 2.5% in 2022. Our model involves the policy rate at 2.25% in 2023, conditional to an appreciation of CZK, which may alleviate the need for aggressive hikes. After the very decisive move by the CNB, the pressure on peer central banks to increase is clearly growing. In particular, the NPB is the subject of fierce crossfire, with headline inflation climbing to 5.8% in September (according to the flash estimate) and the key rate remaining at 0.1%. This week, Romania will reopen ROMGBs 2024, 2025, 2027 and 2034 and offer Treasury bills. Hungary will also offer treasury bills in addition to regular bond auctions.
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