Will Hungarian central bank pause or continue with monetary easing?
|This week, the Hungarian central bank meeting is a key event in the region. There is an extreme division of opinions on whether the central bank will cut the key policy rate further or hold it stable after June’s inflation eased more than was expected. Our baseline scenario is that the central bank will pause as it communicated a careful and patient approach. We do recognize that recent inflation development as well as the relative stability of the exchange rate favor monetary easing. Otherwise, the calendar is quite empty. Poland will publish retail sales growth in June as well as the unemployment rate. The unemployment rate will also be released in Hungary, while wage growth is due this week in Serbia.
FX market developments
Over the last week, the Czech koruna and the Hungarian forint strengthened against the euro. The Polish zloty, on the contrary, weakened. The ECB held the interest rate unchanged at the last meeting, but interest rate cuts in autumn should be expected. This week, the Hungarian central bank will hold a rate-setting meeting. We still believe that it will keep the interest rate stable at the upcoming meeting, however, recent inflation data open the door for more monetary easing than was initially expected. The expectations for more monetary easing have been mounting in Czechia as well, as evidenced by declining FRAs.
Bond market developments
Government bond yields edged down a little last week in both major markets and in CEE, with the exception of Czechia. Czech bonds saw a small correction last week, ending the rally that had lasted since the beginning of July. We believe that market expectations on the pacing of further rate cuts went too far (although not as much as in 1Q24), thus the correction in yields seems to be a healthy one. This week, Romania will reopen ROMGBs 2026 and 2038, and Poland, Czechia, and Hungary will offer a variety of bonds, with the latter two also selling T-bills.
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