NBR

At 16.8%, the November 2022 inflation print is the highest it has been in Romania in almost 20 years. We are reasonably confident that December 2022 will mark the peak of this cycle at around 17.0%. Nevertheless, price pressures in the service sector are becoming more prominent and could nudge the central bank into another 25bp hike to 7.00% in January  16.8% November headline inflation   Higher than expected   While we have attempted to call the peak in inflation already twice this year, we now have a stronger reason than ever to believe that November-December will mark the summit: there are no more months left in the year to see higher prints. November inflation accelerated well beyond the 16.1% Bloomberg consensus but relatively close to our 16.6% estimate. The forecast error on our side came entirely from the service sector where broad price pressures are beginning to surprise to the upside. Inflation (YoY%) and components (ppt) Source: NSI, ING   Headline inflation might inch a little bit higher this month, probably touching 17%. Starting in January 2023, strong base effects should push the headline inflation back around 16.0% while the end of the first quarter could see inflation closer to 15.0%. A gradual descent towards low double digits will follow, but getting back below 10% might not be achievable until the fourth quarter of 2023.    With core inflation already above 14.0%, there is mounting pressure for the National Bank of Romania (NBR) to deliver another hike at the January 2023 policy meeting. While we narrowly opted for the end of the hiking cycle at the current 6.75% key rate, we underlined that a final 25bp increase in January was still a strong possibility. Based on today’s data, the balance might be now tilted toward the latter option. Read this article on THINK TagsNational Bank of Romania Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

The Romanian National Bank (NBR) will announce its latest policy rate decision on 10 January. We narrowly favour a last 25 basis points hike to 7.00%, against a no-change decision. Either way, markets might be rather indifferent to the decision as the ample liquidity backdrop significantly blurs the relevance of the policy rate The Romanian National Bank will announce its latest policy rate decision this week   The end-2022 inflation is likely to close above NBR’s 16.3% estimate, though it might not be that far off, with our forecast standing at 16.6%. Looking at the recent downside surprises in inflation in Germany and Italy, as well as in Poland – on the back of a somewhat generalised fall in commodity prices, but also at the apparent commitment of the National Bank of Poland to not hike rates this year – it all looks like a good moment to put rate hikes on hold in Romania as well. +25bp ING's call change in NBR key rate   However, while it is in decline, inflation is still well into double-digits (and could stay there through mid-2023), while on the external front the ECB is moving into an uber-hawkish zone. In all fairness, there are sensible arguments for both a 25bp hike and a no-hike. Hence, we attach a reasonably high probability (say 30%) of a no-hike decision on Tuesday. A 25bp hike would hardly be a hawkish signal for the market, given the considerable liquidity surplus in the money market. We’ve been wondering for some time (see our November preview) how the NBR will tackle the year-end spending frenzy by the Treasury. Somewhat surprisingly given its official stance and rhetoric, the NBR seems to have a rather tolerant stance. Carry rates have tanked even through the deposit facility for a while now, while the longer tenors are trading closer to the policy rates – be it the key rate or credit facility. While a large chunk of this surplus liquidity could go back to Treasury together with the end-January corporate tax payments, returning to the previous liquidity shortage situation looks improbable. Hints on how the NBR will approach this liquidity situation and/or whether it will change its “firm” stance might be – at least in short term – even more important than the rate decision itself. On the macro front, recent official statements point to an above 5.0% GDP advance in 2022, which would mean that Romania had quite a strong fourth quarter.   We reaffirm that there are sensible arguments for both a no-hike or a 25bp hike at the 10 January meeting. On the former we mention that 1) inflation has peaked and we will start to move lower and lower in the upcoming months; 2) the other CEE3 central banks are clearly on hold; 3) the economy is decelerating. Favouring our 25bp hike scenario are 1) inflation is descending but it is still very high and might not dip below 10% before autumn; 2) the ECB seems determined to continue hiking; 3) stopping after a 50bp hike in November would seem rather sudden and a final 25bp hike better fits Governor Constantin Mugur Isarescu’s repeated mention of the importance of a sequential approach to policy moves. What to expect for FX and rates The Romanian leu, like the entire CEE region, has benefited from favourable global conditions in recent weeks and, with the exception of the last few days of last year, has remained below NBR intervention levels. Although Romania is the least energy-dependent country in the region, the positive impact of the drop in gas prices and the more favourable EUR/USD level has not avoided the Romanian market. These conditions are expected to persist in the coming weeks. Although the carry level is among the lower ones within the region, it is at least stable. Moreover, the central bank maintains strong market confidence not to allow a depreciation above intervention levels. Thus, any EUR/RON upward moves may be tempting for RON buyers. On the bond side, we see that the news of an increase in financing needs for this year has not unsettled the market too much, and Romanian government bonds (ROMGBs) enjoyed strong demand in the first auction of the year, which helped to frontload the needs and together with a sufficient cash buffer, we believe The Ministry of Finance of Romania is in a comfortable position. In addition, the maturity calendar is rather light in the first quarter. Thus, ROMGBs should not come under market pressure anytime soon. From a valuation perspective, the picture is rather mixed. On the one hand, yields at the short end of the curve are near the lows of last May and the long end is near the lows of early December. On the other hand, in relative terms to CEE peers, ROMGBs look cheap. However, especially in the case of the spread against Polish government bonds, the disinflationary story and the dovish NBP are more to blame. But overall, we remain positive on ROMGBs Read this article on THINK TagsNational Bank of Romania Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

In the Czech Republic, we expect the monthly rate of consumer inflation to slow from 1.2% to 0.5%, while in Hungary, we see headline inflation in December of 3.1%, moving the year-on-year reading close to 26% In this article Czech Republic: Mixed inflation picture Hungary: Sudden phase-out of fuel price cap puts pressure on inflation Romania: Ample liquidity backdrop blurs the relevance of the policy rate   Shutterstock Czech Republic: Mixed inflation picture For December, we expect consumer inflation to slow down from 1.2% to 0.5% month-on-month, which translates into an increase from 16.2% to 16.4% year-on-year. Fuel and energy prices will again be the main questions for this print. We estimate that fuel prices fell 10% in December, the biggest month-on-month move since March this year. On the other hand, housing and energy prices slowed from November but still maintained a strong 2.2% MoM growth rate. Food inflation declined for the third month in a row (1.0% MoM) and we can expect seasonal cheapening of clothing in December. Hungary: Sudden phase-out of fuel price cap puts pressure on inflation We expect the Hungarian industry to show mixed performance in November as smaller subsectors will suffer, while car, electronics and electrical equipment manufacturing (including electric vehicle batteries) will keep the year-on-year production growth in positive territory. In line with that, we see a significant improvement in the November trade balance. This is not just a result of a more vivid export sector, but also due to the dropping energy consumption hence the lowering import needs. We see the budget closing 2022 with yet another monthly deficit, although the strong nominal GDP growth will help to meet the 4.9% deficit-to-GDP target (excluding the 1.3% of GDP extraordinary gas purchase). The highlight of the week comes on 13 January, and it won’t bring too much joy from an inflationary point of view. We expect headline inflation in December to be at a monthly rate of 3.1%, mainly driven by the sudden phase-out of the fuel price cap, complemented by further food price pressure. This would move the year-on-year headline reading close to 26%, while we forecast a 25.1% YoY core inflation print in the last month of 2022. Romania: Ample liquidity backdrop blurs the relevance of the policy rate The Romanian National Bank (NBR) will announce its latest policy rate decision on 10 January. We narrowly favour a last 25 basis points hike to 7.00%, against a no-change decision. Either way, markets might be rather indifferent to the decision as the ample liquidity backdrop significantly blurs the relevance of the policy rate. On the CPI front, we expect the 2022 year-end inflation to have reached 16.6%, though downside surprises cannot be excluded. Key events in EMEA next week Refinitiv, ING TagsRomania central bank Hungary EMEA and Latam calendar Czech Repulbic

FX markets continue to trade with cautious optimism on the view that a US slowdown can rein in a hawkish Fed and that a reset in China policy will (eventually) see resurgent consumer demand and perhaps even improved foreign relations. That looks like a good story for the commodity and EMFX complex. Look out for comments from Fed Chair Powell today and the NFIB The market is growing increasingly confident that the Fed will end its tightening cycle this quarter USD: Powell pushback? Risk assets have started the year on a strong footing, with a good performance from both equity and debt markets. Emerging markets are back in fashion after a tough couple of years, where the building view that the Fed can soften its pressure on the monetary brakes plus China re-opening can see quite a strong recovery in emerging market currencies against the dollar. We note with interest a piece in the Financial Times today speculating on China's approach to stimulating domestic demand and also seeking to improve foreign relations. China's softening of a ban on coal imports from China and yesterday's news of a 20% increase in crude oil import quotas are consistent with the article. This comes at a time when the market is growing increasingly confident that the Fed will end its tightening cycle this quarter and embark on an easing cycle in the third quarter. Today will see two inputs into that Fed story in the form of i) comments from Fed Chair Jerome Powell around 15CET today and ii) the NFIB small business sentiment survey. Powell is speaking at a Riksbank conference on central bank independence, making it unclear whether he will today push back against the recent softening in US financial conditions. Certainly, the market does not buy into the Fed's narrative of the funds rate being taken to 5.00% and being kept there for a long time. Markets seem to price a 50bp easing cycle in 2H23. Regarding the NFIB survey, the market will be interested in whether it sinks any further and supports the recessionary readings provided by last Friday's ISM services release. Assuming that neither Powell's comments nor the NFIB breaks the building narrative of a more relaxed Fed (and Thursday's US CPI will also be key for this story), we would expect momentum to remain against the dollar and continue to favour activity/commodity currencies. Speculation will also be building that the Bank of Japan might have a further Japanese government bond (JGB) yield target adjustment in store after the Tokyo ex-food CPI hit 4% year-on-year – a level last seen in 1981. The Bank of Japan meets next week. DXY looks biased towards the 102.00 as investors put money to work on non-USD assets. Chris Turner EUR: So far, so good EUR/USD managed to nudge up to a new high yesterday without the support of much new news. It seems that asset managers are starting the year by placing money overseas, where dollar sales for emerging market currencies seem to lift EUR/USD as well. That said, European equities continue to outperform at the start of the year and eurozone data also continues to surprise on the upside.  For the time being, we would prefer to back further EUR/USD strength – should today's US event risks allow. This could see EUR/USD pressing last May's high at 1.0785. This week there is an outside risk of 1.0950 should Thursday's US December CPI show another soft reading. Before we dust off the call to 1.15, we should note that a re-opened China will compete for global LNG supplies. This means that the issue of high natural gas prices could well come back and bite the eurozone and the euro later in the year. Chris Turner GBP: Better risk environment provides some insulation Sterling has been performing slightly better, helped no doubt by the constructive risk environment at the start of 2023. The UK has quite a large country weight in global equity and debt benchmarks, meaning that flows into these products can provide some support. Sterling barely budged yesterday on comments from Bank of England Chief Economist Huw Pill that there were early signs that the UK labour market was softening. Again, market pricing of a further 100bp BoE hike to the 4.50% area this summer looks resolute. 0.8770-0.8870 may well contain EUR/GBP for the rest of this week, though GBP/USD could have some more upside should US data allow. Chris Turner CEE: Romania closes the hiking cycle in the region Today's calendar in the region offers National Bank of Romania (NBR) policy meeting. Although it seemed likely that we would not see another rate hike after the last meeting, the November inflation number has convinced us that one more hike is more than likely. That is why we expect the last 25bp rate hike today to 7.00%. However, our chief economist in Bucharest, Valentin Tataru, gives a 30% chance that rates will remain unchanged today. A rate hike is unlikely to impress anyone, and we will look for clues as to how the NBR views the liquidity situation in the market. From a rate perspective, we think this meeting should be the last live one, which will close the CEE region's hiking cycle, given that we do not expect rate hikes anywhere else.  The Romanian leu, like the entire CEE region, has benefited from favourable global conditions in recent weeks and, with the exception of the last few days of last year, has remained below NBR intervention levels. Although Romania is the least energy-dependent country in the region, the positive impact of the drop in gas prices and the more favourable EUR/USD level has not avoided the Romanian market. These conditions are expected to persist in the coming weeks. Although the carry level is among the lower ones within the region, it is at least stable. Moreover, the central bank maintains strong market confidence not to allow a depreciation above intervention levels. Thus, in our view, any EUR/RON upward moves may be tempting for RON buyers. Frantisek Taborsky Read this article on THINK TagsNational Bank of Romania FX Daily Federal Reserve Dollar  

At 16.4%, inflation in December was very close to the central bank’s 16.3% estimate and not far from our own forecast of 16.6%. With the peak in inflation safely behind us now and a gradual downward trend to follow throughout 2023, we remain of the opinion that there is very limited scope for more policy tightening and rate cuts can even be envisaged in late 2023   Given the relatively small forecast error, there are few eye-catching components to be highlighted in the December inflation. The major contribution to the slightly lower-than-expected headline number came from fuel prices which declined by over one percentage point more than we estimated. By extension, the entire non-food category witnessed a price dop of 0.3% versus the previous month, with food items advancing by 1.3% and services by 0.7%. Inflation (YoY%) and components (ppt) Source: NSI, ING   Looking into 2023, the inflation profile appears fairly well-behaved, to the extent that double-digit inflation lasting until the third quarter can be described that way. Nevertheless, strong base effects are at play and together with the extension of energy price capping and compensation schemes until 31 March 2025 should provide somewhat more reliable estimates compared to 2022 and even 2021.   The one area we still find relatively problematic to grasp for 2023 and even beyond (setting aside the geopolitics, supply chain disruptions, etc.) is the impact of the wage pressures in the overall CPI. The latest wage data suggests that the average net wage advance in 2022 will be around 12.0%. While this is obviously below the 13.8% average inflation rate in 2022, we argue that the difference is not that sizeable and very likely one of the smallest in the EU. Moreover, we see a good chance that the negative difference will be largely compensated for in 2023. Wages holding up quite well Source: NSI, ING   In all fairness, these robust wage advances will not necessarily trigger a consumption boom, but they should at least preserve purchasing power. While we do not anticipate a price-wage spiral, close attention should be paid to the topic, especially bearing in mind the approaching electoral cycle.   As mentioned in our National Bank of Romania review, we see little scope for more hikes this year. Today’s inflation data reinforces our view. If needed, the NBR will probably make good use of its already deep know-how in managing interbank liquidity, in order to achieve its objectives. We expect the FX rate to hold around current levels at least through spring, while money market rates (say the three-month one) might even have some more room to the downside. Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

January and February will be a moment of truth for Central and Eastern Europe and confirmation that the region has its own inflation story, more persistent than the global narrative. The region's economic picture is generally better than expected, but this also means stronger inflationary pressures and a problem for central banks to cut rates soon In this article Poland: Resilient economy but persistent core CPI remains a problem Czech Republic: Recession confirmed Hungary: A glimpse of light at the end of the tunnel Romania: Strong demand in the economy but also in markets   The Polish Prime Minister, Mateusz Morawiecki Poland: Resilient economy but persistent core CPI remains a problem The Polish economy proved to be relatively resilient to the shocks of war, energy and aggressive rate hikes, both at home and abroad last year. In 2023 we stick to our above-consensus GDP forecast of 1%. Lower gas prices and China reopening support the eurozone and our GDP expectations for Poland. Last year's fourth-quarter GDP backdrop was disinflationary, but the labour market was still tight. According to the National Bank of Poland Beige Book, the percentage of companies planning wage hikes grew to an all-time high of 62.3% due to a tight labour market and a countercyclical hike of the minimum wage by 19.1%. We expect CPI to rise to 18.1% in January and peak at 20% YoY in February. In the following months, CPI should drop by half to about 10% in December 2023. But the problem is the persistence of core inflation. We are not expecting rate cuts in 2023 against quite aggressive market pricing. The government covered more than 50% of borrowing needs, but given the strong sentiment in the Polish government bond (POLGBs) market, it plans for heavier supply in February. Together with the approaching European Court of Justice ruling on 16 February, both of these factors call for tactical profit taking on the POLGBs market. The ruling of the ECJ is the second step in the Swiss franc mortgage saga. The ECJ is expected to judge whether banks can charge clients for the cost of capital, even when CHF mortgages are terminated. Should the ECJ ruling turn negative, local banks may be forced to significantly raise provisions, which should hinder their demand for POLGBs. This is an important systemic risk which needs to be tackled by policymakers. This uncertainty explains the underperformance of the zloty vs CEE FX recently and should also affect POLGBs. Czech Republic: Recession confirmed The flash GDP estimate confirmed the Czech economy entered recession in the second half of 2022. The Czech economy declined by -0.3% Quarter-on-Quarter, mainly due to a reduction in private spending. The good news is that the decline remained still relatively shallow compared to market expectations. The economic contraction has not been mirrored in a significant deterioration of the labour market yet. However, key local car producers have already announced they are planning to reduce their production markedly in the coming weeks due to problems with component supplies. Given the importance of the automotive sector to overall economic performance, it seems the pace of economic recovery will be postponed. We expect inflation is likely to exceed 17% YoY in January, reflecting the increase in regulated prices and food prices. On the monetary policy side, there is no change in our view that the central bank will keep interest rates the same in February. Czech National Bank officials mostly assume that ongoing strong inflation is largely attributable to supply-side effects and should fade during the year, while the current level of rates at 7% is sufficient to tame domestic demand-pull inflationary pressures, together with a decline in consumer spending. Depending on inflation and the performance of the economy, we see the possibility of reopening the discussion on rate cuts in the middle of the year. The Czech koruna strengthened further, which is mostly attributable to the decline in gas prices. Previous interventions by the CNB cooled market pressure on the koruna. We expect a soft correction of the currency to slightly weaker levels and volatility isn't expected to be too much of a problem.  Hungary: A glimpse of light at the end of the tunnel This year could not have started better for a small open economy with a high dependency on energy imports like Hungary. After a rough year, the Hungarian economy is facing a non-negligible tailwind thanks to the improving external outlook on China’s turnaround and the resilience of the eurozone. Internally, the biggest positive surprise is the local labour market, where companies are still trying to retain workers. However, the strength of the labour market is a double-edged sword. It leads us to revise this year’s GDP growth up to 0.7% on average but poses a significant red flag from an inflationary perspective. Wage-push inflation is a real threat now. And though we see the headline inflation peaking somewhat below 26% in January-February, the deceleration will be slow and gradual. This possible tenacity of price increases makes us forecast an 18.5% average inflation rate in 2023. Against this backdrop and seeing the outcome of the January rate-setting meeting, we think that the monetary policy will exercise more patience than other central banks. We see the National Bank of Hungary starting its policy pivot only during the second quarter, gradually reducing the rates of the temporary, targeted tools. Our tighter-for-longer call will be complemented by more conscious fiscal spending this year. Tight fiscal and monetary policy alongside an ongoing significant voluntary energy consumption reduction will help to reduce the current account deficit. We also expect tensions to ease between the European Commission and the government as the latter will meet more milestones, translating into the flow of more EU funds. Against this backdrop, it is easy to understand why we stick to our general bullish view regarding Hungarian assets. Romania: Strong demand in the economy but also in markets The high-frequency data available to date suggest a rather resilient GDP growth in the fourth quarter of 2022, consistent with our current estimate of around 1.0% quarterly advance. This would take the full 2022 GDP to +5.0%, arguably one of the best outcomes one could have hoped for. Much in line with external developments, there are early signs of an accelerated cooling in the economy in January, with the Economic Sentiment Index falling for the third consecutive month, particularly on the back of lower demand in the service sector. On the monetary policy front, the National Bank of Romania is likely done with rate hikes for the rest of the year. While not yet clearly visible, a consolidation of the downward inflationary trend should be more obvious starting in March, when we expect the headline CPI to flirt with 14.0% (from the peak of 16.8% in November). As for actual market rates, they remain somewhat decoupled from the 7.00% policy rate, being heavily influenced by the liquidity conditions in the money market. Speaking of liquidity, January has been an outstanding month for the Ministry of Finance, which managed to issue almost RON20bn in the local bond market, thus absorbing a large chunk of the surplus liquidity created in November-December. We still think that a return to a liquidity deficit situation is unlikely, but smaller surpluses (say below RON5bn monthly) could become more usual. Read the article on ING Economics   Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

The Romanian National Bank (NBR) will announce its latest policy rate decision on 9 February. We don’t expect any change in the key rate level, but a mildly cautious tone could be employed to balance the obvious easing of monetary conditions since the last meeting The Romanian National Bank in Bucharest 7.00% NBR's key policy rate We expect no change   Looking solely at the market data, one might find it hard to believe that the 10 January policy decision in Romania was in fact a rate hike. Pretty much all of the main developments since then have pointed to a relaxation of monetary conditions: the 3-month rate dropped by some 30 basis points and is now trading quite close to the 7.00% policy rate, carry rates in FX swaps have traded consistently below the 6.00% deposit facility, with only a short-lived spike around the beginning of the new reserve maintenance period, while 10-year government bonds dropped by some 25-30 basis points to the current 7.40% on record high demand. On top of that, the EUR/RON not only departed from the 4.95 resistance area but has even tested consistently below 4.90, likely related to local bond inflows. The root cause for the drop in market rates has undoubtedly been the massive liquidity surplus which, according to our estimates, reached historic highs in January, at over RON21bn. This beats by a wide margin our initial estimates, which were somewhat closer to the December surplus of around RON11bn. It also explains why carry rates remain close to, or even below the 6.00% deposit facility despite a record issuance month for the Ministry of Finance which managed to sell some RON26bn worth of bills and bonds in January.   A no-change decision is widely anticipated, but considering the above, we tend to expect a relatively cautious tone from the NBR which might be fearful of the market being too complacent given these recent developments. Possibly more important than the decision itself will be the February Inflation Report which will contain the updated NBR forecasts. We expect the 2023 year-end inflation rate to be revised much closer to our 7.4% estimate. It will also be interesting to watch for the longer-dated NBR estimates, particularly whether they see inflation entering the 1.5%-3.5% target range over the two-year forecast horizon. Our base case is that headline inflation will not dip below 4.0% over the next two years. What to expect in rates and FX markets On the bond side, Romanian government bonds (ROMGBs) have become rock stars within the CEE region since the beginning of the year. MinFin has taken advantage of record demand and good market levels to secure nearly 30% of ROMGBs issuance and 75% of ROMANI issuance since the beginning of the year. On the local currency side, this is by far the most within the CEE region, which together with a heavy cash buffer puts MinFin in a comfortable position. The potential for a sell-off is thus limited in our view given that MinFin can easily avoid issuing bonds if market conditions deteriorate. We can expect auction results to return to normal in the coming weeks, but the ROMGB picture remains positive. Fiscal policy and FX are basically fixed and, unlike some CEE peers, Romania does not face political conflicts with the EU and is not exposed to energy import dependence. Although the level of ROMGB yields is not as attractive as at the beginning of the year, in relative terms against CEE peers, we still do not find them expensive. Overall, we thus remain positive on ROMBGs. The record demand for ROMGBs is also having a positive impact on the Romanian leu, which has been below the NBR's intervention level most of the time since the beginning of the year. Massive inflows into bonds have helped the RON to test levels below 4.90 EUR/RON several times. Plus, global conditions led by falling gas prices and a higher EUR/USD are positive for FX. On the local side, the FX implied yield remains attractive as well, fluctuating steadily in the 6.60-7.00% range for the 3M tenor, comparable to the Czech koruna and Polish zloty. However, given the NBR's solid track record of managing the RON, potential FX depreciation losses look limited, which gives a distinct advantage, especially against the Hungarian forint and Polish zloty. Thus, we continue to expect the RON to hold below the EUR/RON 4.90 level depending on further inflows into RONGBs. Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

The most important piece of data released in Hungary next week will be fourth-quarter GDP. With the cost-of-living crisis reducing domestic consumption, we expect to see a quarter-on-quarter decline of 1.2%. In Poland, we forecast that headline CPI inflation will increase to 18.1% year-on-year in December, due to adjustments to prices In this article Poland: Ongoing economic slowdown Hungary: More proof that Hungary has been in technical recession since mid-2022 Romania: Accelerated cooling in the economy   Shutterstock Poland: Ongoing economic slowdown Current account (December 2022): -€1,418m Our forecasts point to a December 2022 current account deficit of €1,418m amid a sizable trade deficit. We expect a further slowdown in the annual growth of exports and imports to 16.1% YoY and 18.1% YoY, respectively. Our models point to downside risks to trade turnover. At the same time, Poland received a sizable portion of EU funds in December, however, most of this will be recorded under the capital account rather than the current account. If our forecast proves broadly correct, the current account deficit in 2022 would be around 3.1% of GDP vs. 1.4% of GDP in 2021. Flash GDP (4Q22): 2.3% YoY The release of annual 2022 GDP allowed us to estimate that the fourth quarter figure is likely to be slightly higher than 2% YoY. The composition of the headline figure will be unveiled later this month, but annual GDP points to a decline in household consumption in the last three months of 2022, while fixed investment held up surprisingly well. Changes in both inventories and net exports contributed positively to economic growth in the final quarter of last year. All in all, we observe an ongoing economic slowdown and project a weak first half of this year, with a negative annual figure likely in the first quarter. CPI (January 2023): 18.1% YoY Forecasting January CPI was a challenge due to uncertainty linked to price adjustments by enterprises at the beginning of the year and changes to regulated prices. We forecast that headline CPI inflation jumped to 18.1% YoY from 16.6% YoY in December 2022. Although pre-tax prices of natural gas were frozen at the 2022 level and electricity prices for households were also kept unchanged up to a certain threshold of consumption, the anti-inflation shield was withdrawn and VAT rates on energy returned to 23%. Despite an increase of VAT on gasoline and diesel from 8% to 23%, retail prices remained stable as pre-tax (wholesale) prices were lowered. The reading will be less comprehensive than usual (similar to the flash release) and full details will be unveiled in March along with the annual update of CPI basket weights that will also bring a revision of the January figure. We still expect inflation to peak around 20% YoY in February. Hungary: More proof that Hungary has been in technical recession since mid-2022 The only really important data release in Hungary is going to be the fourth-quarter GDP data. We expect the preliminary reading to prove that the Hungarian economy has been in a state of technical recession since mid-2022. After a 0.4% quarterly drop in the third quarter, we see a 1.2% decline in real GDP in the fourth. The cost-of-living crisis impacted domestic demand, thus we see a significant reduction in consumption, while the higher interest rate environment might slow private investment activity. As the government tried to rationalise its own investment activity, postponing some projects into 2023-2024, we also see this as a downward force on economic activity. The only silver lining could be exports, though the extraordinary gas purchases in the last quarter will limit the upside of this positive contribution, in our view. Regarding the production side, the single most important downward pressure will come from agriculture due to a pretty bad performance on the combination of drought, supply and productivity issues. Romania: Accelerated cooling in the economy January inflation should show signs of a consolidation in the downward trend, after the 16.8% peak touched back in November. We estimate the headline CPI around 15.4%, with risks skewed slightly to the upside due to car fuel prices which might have increased above our estimates after the removal of 0.5 lei subsidy starting in January. In any case, the bigger trend remains to the downside and we expect headline inflation to reach single digits around September 2023. The high-frequency data available to date suggest rather resilient GDP growth in 4Q22, consistent with our current estimate of around a 1.0% quarterly advance. This would take the full 2022 GDP to +5.0%, arguably one of the best outcomes one could have hoped for. Much in line with external developments, there are early signs of an accelerated cooling in the economy in January, with the Economic Sentiment Index falling for the third consecutive month, particularly on the back of lower demand in the service sector. Key events in EMEA next week Refinitiv, ING Tags Romania Poland inflation Hungary EMEA and Latam calendar EMEA Read the article on ING Economics   Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

The 1.1% sequential expansion of the economy in the fourth quarter of 2022 came largely in line with expectations, taking full-year GDP growth to 4.8%. January inflation, on the other hand, came in significantly below expectations at 15.1%. We are likely to see sharply lower inflation estimates from the central bank in tomorrow's Inflation Report Source: Shutterstock GDP: great in 2022, good in 2023? It’s been a pretty big day on the macroeconomic front for Romania. Arguably the most important news is that the economy expanded in the fourth quarter of 2022 by 1.1% versus the previous quarter and by 4.6% when compared to the fourth quarter of 2021. This takes the full-year GDP growth to 4.8% which is perhaps among the better figures that one could have hoped for. Being a flash release, there is no other data to chew on except for the overall growth, with details of the growth drivers due to be published on 8 March. What we do know from the available high-frequency data (in some cases the December data is not out yet) is that it’s been a strong quarter for construction activity which expanded by approximately 8.0% versus the third quarter. Services were also around 2.0% higher while retail sales rose by 0.8%. Industrial production lagged behind at -2.1%. Looking to 2023, our 2.5% GDP growth forecast was at the higher end of the estimates for a time, but now looks to be the consensus after many analysts and institutions revised their expectations higher as well. We maintain the current forecast and evaluate that risks are - dare we say - skewed to the upside! While a slowdown in private consumption could be visible in the first quarter of 2023, which could even bring the overall GDP growth close to zero, the strong momentum in investment activity (presumably related to EU-financed projects) should continue, and prevent a contraction. Corroborate that with a somewhat looser monetary policy due to laxer liquidity management and the picture for 2023 does not look all that grim. Read next: GBP/USD Pair Rose Sharply Above $1.22, EUR/USD Pair Also Rose| FXMAG.COM Inflation: below expectations, though not exactly for the right reasons At 15.1% in January, the headline inflation rate came in way below market expectations of 15.8% (Bloomberg survey) and even below our 15.4% estimate which was the lowest point in the survey. However, the details have been rather surprising as we did not account for the sharply lower electricity prices (-15.8% versus December 2022) and considered a much smaller number. For this reason, prices for non-food items posted a monthly decrease of 1.0%. Energy aside, the rest of the price increases have been above expectations, with food items advancing by a monthly 1.5% and services by 1.8%. In particular, fresh fruit was almost 5.0% higher than in December, while the rise in excise duties for alcohol has pushed these items over 3.0% higher. Core inflation inched higher towards 14.9%  from 14.7% in December. While below expectations, today’s inflation data is unlikely to change the National Bank of Romania's mindset. A new Inflation Report is due to be presented tomorrow 15 February and will contain the updated NBR forecast. We expect the 2023 year-end inflation rate to be revised much closer to our 7.4% estimate – for which we are actually starting to see risks to the downside. It will also be interesting to watch for the longer-dated NBR estimates, particularly whether they see inflation entering the 1.5%-3.5% target range over the two-year forecast horizon. Our base case is that headline inflation will not dip below 4.0% over the next two years. Read this article on THINK   Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more  

Industrial production contracted by 2.0% in 2022 and 4.6% year-todate. As of March 2023, it remains almost 6.0% below its prepandemic levels (ie, January 2020). Among the few brighter spots are the food, automotive and pharma sectors which have continued their upward trend and are above both the pre-pandemic period and the similar period from 2022. On the downside, the textile and chemical industries are both some 35% below their pre-pandemic levels, followed by the metallurgical industry at 30% below. The latest confidence data does not look particularly encouraging as production expectations and capacity utilisation collapsed in May 2023 to a two-year low. The number of employees remained fairly constant, though significant shifts occurred within subsectors.   Industry still below pre-pandemic levels   Fiscal picture is improving but we are not there yet   Elections and social demands could derail the adjustment The 4.4% of GDP budget deficit target for 2023 was shaping up to be quite challenging and it definitely is. As of April 2023, the budget deficit reached 1.72% of GDP and already prompted the government to come up with a mild (read: insufficient) spending optimisation plan, amounting at best to some 0.3% of GDP.   Given the social demands for higher wages (at the time of writing there is an ongoing major strike in the public education sector) and the lower GDP growth (leading to lower budget revenues), a more substantial adjustment is likely to be needed at the usual mid-year budget revision. The good news is that sticking to the 4.4% of GDP target for 2023 seems to be a priority.   The bad news is that it might involve cutting public investments which were just catching up some speed.   Current account deficit remains Achille’s heel (% of GDP)   Inflation (YoY%) and main components (ppt)   Economic slowdown and lower fiscal gap are helping The current account deficit (CAD) surpassed the worst fears in 2022 as it reached 9.4% of GDP, from 7.3% in 2021. We estimate that at least 1ppt of the 2022 deterioration came from worsening terms of trade, which should be largely reversed in 2023. As mentioned many times already, we remain particularly worried about the stickiness of the CAD and blaming it on the fiscal deficit only holds so much. More positively, the financing structure of the CAD looks relatively sound.   We estimate that over the next 3-4 years, between 70% and 80% of the deficit can be covered via non-debt-creating inflows such as FDIs and EU funds. As a consequence, we estimate that a CAD of 4.0-5.0% of GDP could be considered a ‘natural’ level for an emerging economy like Romania. But we’re not there yet…   Switching to single digits by the Autumn After remaining consistently at the lower end of inflation forecasts, it seems things are finally turning our way: inflation looks set to touch 7.0% by the end of 2023, driven by base effects, lower energy prices and an easing of food prices.   We reduce our 2024 year-end estimate to 4.0% from 4.3% previously, while maintaining the view that inflation will not reach NBR’s 1.5-3.5% target range over the next two years. These developments alone (especially those from 2024) would allow the NBR to cut the key rate quite significantly and still maintain a positive real rate. However, we believe that the NBR will want to consolidate the lower inflation prints and will maintain a relevant positive differential between the key rate and inflation, at least until we see inflation within NBR’s target range.

FX Daily: Dollar bears still need data evidence US markets reopen today and FX volatility should pick up again. The minutes from the June FOMC meeting will be in focus but we doubt markets will find much evidence to turn any less hawkish on Fed tightening, which will leave data releases the task of driving any substantial dollar move for now. Expect the NBR's hawkish tone to continue.   USD: Back from holiday Thinner volumes at the start of this week have coincided with some moderate support for commodity currencies in the G10 space. US markets re-open today and we expect some pick up in FX volatility, with both Fed communication and data coming into focus. The minutes from the June FOMC meeting are the main highlight today. First of all, the minutes will shed some light on the compromise between keeping rates on hold but strongly signalling more hikes ahead. From a market perspective, it will be key to gauge where most of the committee sees core inflation dynamics going and the scope for further tightening. Markets will also be sensitive to any details about members’ positions on rate cuts. We heard some strong pushback by Fed Chair Jerome Powell in the post-meeting press conference against cuts in 2024, but the dot plot projections show easing starting sometime next year. Overall, the dot plot projections and the post-meeting Fed communication suggest that markets may not find many hints to recalibrate their tightening expectations lower today. If anything, the trigger for such a dynamic would be weak US data. Today, the calendar is not particularly heavy in the US: factory orders for May and the final print of durable goods orders. Tomorrow’s ISM services and ADP employment figures are a bigger risk event for the dollar.

EUR/RON: Unstable line in sand     EUR/RON touched 4.98 in May, then returned to 4.96 in June and is back to 4.95 in July, the earlier central bank line in the sand. Higher volatility does not indicate a central bank presence in the market, however the high liquidity surplus in the market indicated by the May numbers would suggest that the NBR should be open to market activity. The new temporary range is likely to be 4.94-4.98 EUR/RON for now. We can expect at least one more upward shift this year and we maintain our 5.02 estimate for year-end.  

CEE: Inflation in Hungary finally below 20% Yesterday's meeting of the National Bank of Romania (NBR) was as expected and there were no surprises. Tomorrow, the NBR will present a new inflation report, however, for now we have silence from this side. This morning, July inflation in Hungary was released, posting a drop from 20.1% to 17.6% year-on-year. This is 0.1pp below market expectations and 0.1pp above central bank expectations. While inflation remains by far the highest in the CEE region, it is below 20% for the first time since last September and we expect it to be in single-digit territory by the end of the year. This is good news for the economy and the central bank, but also good news for the forint. Without many surprises, the market has no reason to push the central bank to cut rates faster, undermining the main attraction – FX carry. This, despite the decline in recent weeks, is one of the highest in the emerging market universe and by far the highest in the CEE region. Later today we will also get the Hungarian state budget result for July. The last two months show signs of stabilisation of the deficit at 85% of this year's target. State budgets are showing bad numbers across the region. However, in the Czech Republic, we have already seen the trend turn over, and in Romania, the government is trying to come up with a revision of the state budget in an attempt to keep the numbers under control. Today, we expect the deficit in Hungary to remain roughly unchanged. This should be good news for Hungarian government bonds. However, in case of a negative surprise, we could also see a spillover into FX due to the higher market attention. Moreover, this topic is of course linked to the EU money issue, which we expect to be back on the table in the coming weeks. So overall, everything revolves around the Hungarian forint at the moment. Values around 390 EUR/HUF open the question of whether we will hear some comments from the National Bank of Hungary, given that we are entering sensitive waters. Market positioning is probably rather balanced after the sell-off over the last few days, so we believe this leg of the move-up is over. But it is also hard to see a quick recovery. Despite a lot of local story, the correlation with the US dollar has been almost perfect for the past month. In other words, the main driver in our view is global factors and we don't see too much potential either way on this into US inflation numbers. So EUR/HUF may try to lower levels but we don't expect a big rebound after today's numbers.

Romanian inflation finally dips into single digits After a couple of months of questionable inflation data, July confirmed that double-digit inflation prints are now safely behind us. However, consistently strong wage advances might complicate the disinflation story as the 2024 electoral year approaches.   The 9.44% July inflation print surprised marginally to the downside (vs our 9.60% estimate) due almost exclusively to lower electricity prices. Recently-adopted caps on the mark-ups of basic food products seem to be working already, slightly ahead of schedule, and might cause another downside surprise to August inflation, which we currently estimate at around 9.0%. To put a number on it, food prices decreased in July by 0.5% versus June (+16.3% year-on-year), which marks a return to more usual seasonal behaviour. Non-food items advanced by 0.25% (+4.3% YoY) with pretty well-behaved price dynamics across the subcomponents, while services remained a mild outlier, advancing by 1.00% monthly (+11.6% YoY), a slight upset in an otherwise positive inflation print. Perhaps the less-than-positive news for today comes from core inflation which proves to be quite sticky, falling to 13.2% in July from 13.5% in June. At this moment it is not certain that we will see core inflation below 10% this year, though our base case is that it will dip below in December. In any case, core inflation is probably less of a concern for the National Bank of Romania (NBR) right now, as it most likely wants to see headline inflation safely lower first.   Inflation (YoY%) and components (ppt)   Strong wage growth is here to stay The average net wage advance continues to impress, printing at +15.7% in June and it looks increasingly likely we'll see full-year average wage growth above 15.0% in 2023. Besides the usual sectors which have posted above-average wage advances lately (e.g. agriculture, IT services, transportation etc.), June saw a whopping 28.7% increase in the public education sector’s wage, boosting the general public sector average wage growth to 14.0%, not far from the 16.1% growth in the private sector. This trend is most likely to continue in the coming quarters, given recent and ongoing public wage demands and the approaching electoral year. The extent to which the strong wage advance will filter into inflation is still unclear, given that it overlaps a period of fiscal uncertainties, economic slowdown and still relatively high interest rates which are more stimulative for savers. However, it is also difficult to believe that it will have no effect either. As recently underlined by the NBR’s Governor, Mugur Isarescu, wage-led inflation might prove quite dangerous and tricky to control, given that it could require a further restriction of the aggregate demand via even higher interest rates.   Positive real wages to support consumption   We maintain our estimate of a 6.9% year-end inflation reading, though we admit that risks are mildly to the upside on the back of the recently announced (but not yet adopted) fiscal package. These risks have been clearly underlined by the NBR as well, as they indeed have the potential to derail the disinflation story. On the other hand, next year’s profile hasn’t changed much, as we see headline inflation below 7.0% (NBR’s key rate) in February 2024, followed by a gradual descent toward the 4.0% area by the year-end, where our projection also stabilises for the medium-term. All in all, we remain reasonably confident that the NBR will start the cutting cycle in the first half of 2024, with a total of 150bp cuts by the year-end. If anything, risks are for the cycle to be more backloaded rather than frontloaded. To the extent that the global risk sentiment will not worsen, it is likely that the accommodative liquidity conditions are here to stay for longer, though we tend to be increasingly cautious about this.

FX Daily: Not too hot to handle Rate expectations were not moved by slightly hotter-than-expected US CPI, and support for the dollar has mostly come through the risk-sentiment channel. Range-bound trading may persist despite conditions for a stronger dollar. Inflation in the CEE region is falling; the NBR leaves rates unchanged.   USD: Markets still attached to March cut US CPI data came in a bit hotter than expected yesterday, with the core rate rising 0.3% MoM and slowing to 3.9% YoY versus 3.8% consensus. The upside surprise in headline inflation was bigger: an acceleration from 3.1% to 3.4% YoY versus the 3.2% consensus. The dollar jumped after the release, also thanks to weekly jobless claims printing lower than expected. Somewhat surprisingly, the US yield curve did not react by scaling back rate cut expectations, as a knee-jerk selloff in 2-year Treasuries was fully unwound within an hour of the CPI release. We've already discussed how we did not expect this inflation read to leave a long-lasting impact on markets, and it definitely appears that most of the fixed-income investor community is almost overlooking the release. The support to the dollar appears mostly tied to the negative response in equities, given the neutral impact on short-dated US yields. A March rate cut is still over 60% priced in, and we still see short-term vulnerability for risk assets from a hawkish repricing. The conditions for a higher dollar this month are surely there, but we have observed numerous indications that markets remain reluctant to make short-term USD bullish positions coexist with the longer-lasting view that US rates will take the dollar structurally lower by year-end. The chances of rangebound trading until we receive clearer messages by activity data and the Fed are high. Today, PPI figures for December will be released, adding information about lingering price pressures and potentially steering the market a bit more. On the Fed front, we’ll hear from hawk Neel Kashakari.