Central bank’s meetings in Czechia and Hungary

This time we begin with last week’s events, as the CEE region has been battling floods after heavy rainfall. We anticipate that the economic impact on GDP growth will remain limited. Despite the floods being as heavy as in 1997 in many places, the affected countries seem to have been better prepared. Not only were the forecasts more accurate, allowing the affected areas not to be taken by surprise, but the countries have also invested in flood control measures as well as retention basins. In the short term (by the end of this year), the industrial sector should receive a negative impulse in all countries impacted by the flooding. Tourism in the regions may suffer as well. Finally, the damage to crops may have inflationary effects. Once the restoration work begins and the reconstruction of buildings and infrastructure takes place, the construction sector will get a boost, adding to GDP in the medium-term horizon.

This week, the meetings of the central banks in Czechia and Hungary are key events in the region. We believe that both central banks will continue with monetary easing. Apart from that, August’s retail sales growth will be published in Poland and Slovenia. Further, labor market data will be released in several CEE countries. In Hungary, August’s unemployment rate and July’s wage growth will be released. The unemployment rate will also be published in Poland and wage growth will be released in Serbia. Finally, Moody’s should evaluate Romania’s rating and outlook on Friday after the market closes.

FX market developments

In the aftermath of the FOMC meeting last Wednesday, at which the interest rates were reduced by 50bp, CEE currencies have strengthened against the euro. There are two central bank meetings this week in the region. In Hungary, the central bank took a pause in August, but after the ECB and the FOMC meetings, we expect another 25bp rate reduction to 6.5% in Hungary. Although August’s headline inflation surprised to the downside, the inflation outlook has not really changed. Further, new inflation and growth projections will be published by the Hungarian central bank. In Czechia, we also expect monetary easing to continue. Further, in Czechia, the post of board member will need to be replaced in December. The economist Jakub Seidler (currently chief economist at the Czech Banking Association) will be named by the President Pavel to replace Tomas Holub at the central banker’s post.

Bond market developments

Throughout last week, the long end of the curve shifted slightly up in most of the CEE countries. Floods across the region will require some fiscal support in several CEE countries. The Czech Ministry of Finance announced an increase in the budget deficit by CZK 30bn compared to the initial plan of CZK 252bn (roughly 0.4% of 2023 GDP) and by CZK 10bn in 2025 (0.1% of GDP). Poland created an additional reserve of PLN 1bn to combat the effects of flooding. On top of that, the EU pledged to support Poland with EUR 5bn, although that still may not be enough to cover all losses, according to the Minister of Finance. In general, Ursula von der Leyen announced that countries hit by floods would have access to a EUR 10bn fund. The Romanian government presented a budget rectification, with a new deficit target of 6.94% of GDP for 2024, compared to 5.0% expected at the beginning of the year, driven mostly by fiscal easing ahead of elections. In Slovakia, the government proposed a budget package worth EUR 2.7bn, including the introduction of higher taxes (the value-added tax rate will increase to 23% from 20%, and a transaction tax will be introduced) to reduce the general government deficit to 4.7% of GDP in 2025. In Serbia, on the contrary, fiscal expansion is likely to take place as hefty increases in minimum wage and pensions are expected in 2025 (far beyond inflation impact).

Download The Full CEE Insights