CEE: Good news for the region

This week will see several central bank meetings in the region. Tomorrow, the Hungarian National Bank will meet for its monetary policy decision. We expect another 100bp cut in the overnight deposit rate, as in May, from 17% to 16%, in line with expectations. The forward guidance and the tone will remain unchanged as well, in our view. This means that the approach remains cautious and gradual and the decisions ahead are still data- and sentiment-driven. On Wednesday, we will see the Czech National Bank meeting leaving rates unchanged.

The main question here is what the vote split will be. In May, three of the seven members voted for a rate hike. Since then we have seen lower inflation and wage growth numbers, which could change the outcome of the vote, but we expect the CNB to continue its hawkish tone. We will also see industrial and labour market data from Poland on Wednesday. The Central Bank of Turkey is scheduled to meet on Thursday, the first since the appointment of new economic names. We expect a big jump in interest rates from 8% to 20% and see upside risks.

On the FX market, the higher EUR/USD is clearly good news for the CEE region, and on top of that market remains in a positive mood and the drop in gas prices, which jumped last week to the highest levels since April, should play into the hands of HUF and CZK. And we should see positive news for FX at the local level as well. Markets like the story of monetary policy normalisation in Hungary and we believe the market will take the opportunity of a weaker forint as an opportunity to build new HUF positions and benefit from the significant carry.

Thus, we expect the forint to return to 370 EUR/HUF. In the Czech Republic, the market is currently pricing in a first rate cut as early as September. In our view, the CNB governor will try to postpone the dovish market pricing, which, together with global factors, should help the koruna back to stronger levels below 23.70 EUR/CZK.