Tightening is the watchword of monetary policy
A busy week is shaping up as three regional central banks have to review their monetary policy. Poland’s central bank kicks off the series of meetings with its session on Tuesday which is expected to lead to another 50bp hike, taking the key rate to 2.75%. The Romanian NBR follows the next day and the bank is expected to stick to its gradual pace of 25bp increases. We expect the rate this week to be raised to 2.25%, and then further rate hikes of 25bps each are expected thereafter, with the end-of-cycle rate being reached at 3% by mid-2022. Thus, the rate of the credit facility should reach 4% by mid-2022, and will probably become the relevant operational instrument. The Central Bank of Serbia, which meets on Thursday, is expected to stick to its key rate of 1% as long as the repo rate is below this level (currently the repo rate is 0.71 %). Given the pace of recent repo rate hikes, it could match the policy rate in late March or early April; we therefore expect the first hike in April or May at the latest. January inflation impressions will be published 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 price revision behavior most likely at play as well. In addition, industrial production impressions for December are expected for Slovakia, Czechia and Slovenia. With some potential easing of supply-side issues late in the year, the industry may have grown 1.3-2% YoY in Czechia and Slovakia, and 6% YoY in Slovenia .
Changes in the foreign exchange market
The EURUSD has been quite volatile over the past two weeks. While statements from Fed Chairman Powell in late January increased the risks of rapid monetary tightening over the next few months, which pushed the EURUSD towards 1.11, Chairman Lagarde’s press conference at the The outcome of the ECB meeting just over a week later and the ECB’s concern The further rise in inflation weighed on the US dollar as it hit 1.1450 against the euro. The strong fluctuations of the EURUSD also affected the currencies of the CEECs. The Hungarian forint and the Polish zloty continued to appreciate and rose to 354 against the EUR and 4.54 against the EUR respectively. Ahead of last week’s rate-setting meeting in the Czech Republic, the koruna briefly touched 24.10 against the euro but pared gains as the central bank acted in line with expectations and raised the benchmark rate by 75 basis points at 4.5%. In our view, the current EURCZK level is in line with fundamentals and we expect the currency to fluctuate around 24.40 against the EUR until the end of the year. This week, three central banks are holding their rate-setting meetings. While the National Bank of Serbia is expected to remain at a standstill, the National Bank of Poland and the National Bank of Romania will raise their key rates again. We expect a 50bp rise to 2.75% in Poland and a more moderate 25bp rise to 2.25% in Romania. Although the SNB will most likely keep the key rate unchanged this week, we expect the first rate hike to be made in April-May as the central bank will run out of ammunition on the repo rate, which currently sits at 0.71%. We see the key rate at 2.0% at the end of the year in Serbia.
Bond market developments
The ECB meeting and President Lagarde’s statements at the press conference were the “event” of last week. As President Lagarde has at least placed monetary policy tightening this year within the realm of possibility, the German Bund curve has moved significantly upwards by about 25 basis points. While the 2-year yield reached -0.28%, the 10-year yield rose to almost 0.2%, the highest level since the start of 2019. Thus, spreads against the 10-year Bund widened considerably. tightened by around 30-50 bp in the Czech Republic to 295 bp, in Poland to 365 bp. and in Hungary at 466bp. In Romania, the long end underperformed somewhat, with the 10-year yield climbing above 5.5% following the announcement of the issuance schedule for February and the bond auction of the last week. As a result, the spread between the 10-year ROMGB and the 10-year German Bund remained broadly stable at around 540 basis points.
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