This week, inflation figures for July will be released in most Central and Eastern European countries. In Czechia, Hungary and Serbia, we expect headline CPI to rise further, while in Romania we expect the peak to have been reached in June and inflation to ease in July. The other CEECs should experience the peak of inflation during the third quarter. The Central Bank of Serbia is due to hold a rate-setting meeting and we expect another 25bp hike to bring the key rate to 3%. Finally, data on industrial production growth and trade for June will be released across the region. It will be interesting to see if export activity has already been affected in light of the slowdown in the German economy.

Changes in the foreign exchange market

Both the forint and the zloty strengthened further over the past week, with the former firming 2.4% just below 395 against EUR and the latter marking a softer move to 4.70 against EUR. Recent gains in the forint allowed the Hungarian central bank to keep its one-week deposit rate unchanged at 10.75%, as expected. In Poland, July’s flash inflation remained at a 25-year high of 15.5% year-on-year, perhaps raising the odds that the central bank is approaching the peak of its tightening cycle. However, it is still too early to tell and the differences of opinion within the MPC persist. Last week’s meeting of the Romanian central bank led to a 75 bp hike to 5.50%, the credit facility rate, as a relevant operational policy instrument within the framework of a management policy strict liquidity policy, reaching 6.50%. On the other hand, the Czech National Bank (under its new composition MPC) left its key rate unchanged at 7%. The CNB also decided to continue to actively prevent large fluctuations in the koruna through its foreign exchange market interventions and temporarily shifted the monetary policy horizon from 6 months to 18-24 months, implying less pressure on policy tightening. The krone stands at 24.60 against EUR. Thursday brings Serbia’s central bank meeting – we expect a 25 basis point hike to 3% as global price pressures are still evident and peak inflation remains ahead of us.

Bond market developments

While the development of the short end of the curve differed in the CEE countries, long-term yields fell by 3 to 19 basis points everywhere except in Romania early on Friday. However, many reversed moves afterwards and only the Czech 10-year yield was down from the previous week on Monday morning. The 10-year ROMGB yield remained the highest in the region at 8.22%. Even though the Romanian yield curve briefly inverted in late July, the 10Y-3Y spread returned to low but positive numbers. In contrast, the Czech, Hungarian and Polish yield curves remain inverted below the 10Y-2Y comparison. According to official ECB data, the central bank has used the flexibility of its first line of defense – the reinvestment of repayments from the PEPP pandemic program – to help peripheral countries. Net purchases of debt by Italy, Spain, Portugal and Greece totaled €17.3 billion from June to July, while holdings of German, French and Dutch bonds were reduced by 18.9 billion euros over the same period. Romania is planning several auctions this week – from treasury bills to bond auctions (with maturities ranging from 2025 to 2032). Treasury bills will also be issued in Hungary and Czechia, and Czech 2031 bonds are also expected to be offered this week.

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