The hawkish Czech central bank in the spotlight
This week is filled with exciting events and releases. Thursday’s meeting of the Czech National Bank should bring another wave of monetary tightening, as the CNB remains hawkish and could raise its key rate by 75bp to 4.5%. However, the uncertainty is relatively high, as the strength of the koruna and the shock of high energy prices could prompt the central bank for a more moderate hike of 50 basis points, while the rise in inflation in January, which won’t be released until later in the month, is expected to top 9% YoY and could warrant a 100bp step instead. Additionally, a 4Q21 Czech GDP flash release will be released. We are forecasting a contraction in economic activity of 0.2% q/q, affected by weak car exports. Still, the year-over-year growth pace could be 2.3% and given the large contribution from inventories, we think future revisions are quite likely. Serbia will also publish its flash GDP for the end of the year which, thanks to domestic demand, is expected at a sustained pace of 7.2% y/y (expanding by 1.7 q/q). Poland will release its FY21 GDP growth and we expect it to land at 5.5%, marking a strong recovery from the crisis. In addition, monthly retail sales and industrial production figures for December will be released in several countries. Retail sales were probably quite mixed in the CEECs, as local restrictions, inflation or weaker business activity reported by industry executives could have weighed on them in Slovakia, Hungary and Romania, while retail Serbian retail has probably recorded a brisk growth rate of 9% per year. /y. Growth in industrial production in December is seen at a sustained pace between 3% and 4.5% year-on-year in Serbia, Croatia and Hungary.
Changes in the foreign exchange market
The Fed’s hawkish turn and aggressive market bets for policy tightening in the US supported the US dollar, which hit its highest level since mid-2020 at 1.1150 against the euro. This strong appreciation of the USD had a relatively moderate impact on the currencies of the CEECs, which only weakened to a limited extent against the euro. In fact, the larger than expected rate hike from the Hungarian central bank and the hawkish tone of the statement supported the forint. In the coming months, we expect the EURHUF to move within the 355-365 range. While the MNB will continue to raise rates, with the cycle peaking at 5% in May 2022, the external environment warrants caution. Prior to this week’s rate setting meeting in the Czech Republic, the koruna was fluctuating in the 24.40-24.60 range against the euro. We expect the Czech National Bank to raise its key rate by 75 bps to 4.5%, which should mark the end of the cycle. However, given the substantial strengthening of the CZK over the past few months, as well as the negative shock from high gas and heating prices, the CNB might opt for a 50 basis point hike.
Bond market developments
The CEE bond market reacted with yield increases to the outlook for higher rates in the US and the CEE region. 10-year yields rose 20 bps w/w in Hungary and Poland on hawkish comments from the two central banks, which tried to reassure the market that they will carry out further rate hikes this year . As a result, 9×12 FRAs in Hungary and Poland increased by 50 bps and 70 bps w/w, respectively. Additionally, in the US, a rate hike at the March meeting seems certain and further hikes are expected throughout the year. The reaction on the short end of the HGB and the middle part of the POLGB yield curves was much greater (+40 bps w/w) than on the long end, thus contributing to a flattening of the respective yield curves. The auction calendar is quite empty for this week. Considering the maturing bonds worth HRK 3.5 billion and EUR 500 million in Croatia, LCY bond issues can be expected.
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