This week in EEC
Inflation and monetary policy will be in the spotlight this week, as we await a flood of CPI impressions and the decision from the Hungarian central bank. Another 30bp hike in the policy rate to 2.4% is most likely at Tuesday’s MNB meeting, however, the Hungarian central bank may adjust the policy rate closer to the 1-week deposit rate, which would indicate a bigger step. The review of the QE program, which should be phased out soon, as well as the publication of economic and inflation forecasts, are also planned. Consumer price growth is likely to accelerate further in the region in November. Fuel and food prices continue to play a visible role, combined with several local factors. The Croatian CPI printing is expected to have accelerated to 4.2% yoy and the Slovakian to 5.4% yoy. Serbian inflation has likely increased to 7.1% yoy, while Romania’s CPI growth is expected to just over 8% yoy. Romania’s gas bills were not impacted by the price caps and subsidies in November, but the impact should be visible in December. Flash Polish inflation of 7.7% yoy should be confirmed, with core inflation accelerating to 4.7% yoy last month. In addition, inflationary pressures remain high in production as well – we expect Czech producer price growth to peak at 13.3% yoy in November. In addition, October industrial production in Romania likely fell 6.6% year-on-year, due to supply issues. We will also see the first real economy data for November for Poland. Employment and wage growth probably remained strong at 0.5% yoy and 8.5% yoy, respectively.
Evolution of the foreign exchange market
The previous week was calm in the EEC foreign exchange market, with currencies broadly unchanged. The Hungarian central bank made its fifth rate hike in a month, raising the one-week deposit rate from 20 bps to 3.3%. Despite the increase announced and Deputy Governor Virag reiterating the MNB’s commitment to further rate hikes, the Hungarian forint weakened slightly towards 365 against the euro. This week, all eyes will still be on the MNB, with the central bank due to hold a regular rate-setting meeting. Considering the weeklong deposit rate increase last week, we would expect the MNB to raise the policy rate by 30bp to 2.4% and follow with the same deposit rate increase later. this week. Elsewhere, the National Bank of Poland raised the target rate from 50bp to 1.75%, raising it above the pre-pandemic level. The statement released after the decision suggests the central bank will continue to raise rates, but the pace of tightening may be slower than expected. Governor Glapinski sees room for further rate hikes, but in his opinion the NBP “has already raised rates quite significantly.” The move left markets somewhat dissatisfied as a more aggressive rise was incorporated, causing the PLN to weaken towards 4.62 against the EUR. EURCZK is trading in the 25.4-25.50 range, while the National Bank of Romania keeps a tight grip on the exchange rate as EUR RON remains pegged at 4.95. We expect the leu to weaken somewhat at the end of the year to 4.98 against the euro.
Evolution of the bond market
The EEC government bond markets eventually suffered some correction; yields fell and spreads (also on Eurobonds) narrowed last week. The most visible movement occurred on the HGB yield curve, where the 10-year yield fell 25bp w / w and the curve continued to flatten around 4-4.20%. It appears that reducing government bond purchases is not doing too much harm to HGBs, as it adds credibility to the recent tightening, which may help anchor inflation expectations and thus keep rates at a lower level. high in the medium term. We expect yield curves to flatten or even invert over the next few quarters in all countries where central banks have taken bold steps to fight inflation. This week, Czechia will reopen CZGB 2027, 2029, 2033, Romanian ROMGB 2027, 2031, 2036 and Serbia SERBG 2025. In addition to this, Czechia, Hungary and Romania will issue treasury bills. On Friday, Moody’s is expected to publish its review of Slovakia’s sovereign rating, which currently sits at ‘A2’ with a stable outlook.
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