Throughout the week, we will continue to see inflation numbers across the region. On Monday, the Czech Republic will release November inflation. We expect a significant slowdown to 7%. However, if we take into account the impact of last year’s savings tax, it would be closer to 4%. On Tuesday, Serbia will release its headline inflation, which is also expected to moderate in November. On Wednesday, it will be Romania’s turn to release inflation data. Slovakia will follow on Thursday and Poland and Croatia will confirm flash estimates on Friday. Elsewhere, we will see industrial production growth in October from Slovakia, Slovenia and Romania. On the trade front, Romania and Poland will release trade and current account balances for October.
Finally, on Friday after the close, Fitch will announce Hungary’s rating, which currently has a negative outlook. Given this year’s improvement in the external balance, stable financing position, lower gas prices and rapid disinflation, a downgrade is not fundamentally justified, in our view. A weak fiscal position and unresolved discussions with the EU and delays in cash flows would make Fitch reluctant to upgrade the outlook from negative to stable. We therefore expect no change.
CEE currencies weakened against the euro throughout the week. The simultaneous move suggests that global factors are at play, as investors seem to be shifting expectations that major central banks will start easing monetary policy sooner rather than later amid falling inflation and weak economic performance. In the region, the Polish and Serbian central banks kept policy rates unchanged at their meetings last week.
This week, markets in the region will focus on the Fed and ECB meetings, especially in the context of the recent decline in inflation. In terms of inflation developments, the Czech Republic will be in particular focus this week, as the country is just ahead of its latest central bank meeting (scheduled for the following week) and the decision on whether to cut interest rates remains unclear. Governor Michl commented that on the one hand it is time to move on, but on the other hand he stressed that the central bank will remain hawkish and cautious with monetary easing.
Bond Market Developments
Long-dated yields continued to fall this week, mirroring developments in the core markets. The long end of the curve in Germany shifted noticeably lower as market expectations for the start of monetary easing shifted in response to November’s flash inflation estimate of 2.4% y/y. This week’s focus will be on the Fed and ECB meetings, which will also be key events for market action in the region. Locally, the Czech Republic, Poland and Romania will be active in the bond market this week.
On Friday, Fitch downgraded Slovakia to ‘A-‘ with a stable outlook.
The main reason for the rating change was the recent development of public finances and uncertainty about fiscal consolidation.As a result, Slovakia may face higher borrowing costs in the future.