CNB set to cut rates this week, but by how much?

This week's economic releases start with Poland's retail sales for May, which are expected to show an increase to about 5.8%. On Tuesday, the unemployment rate in Poland is anticipated to slightly decrease to 5%, while Serbia will report its wage growth for April. On Thursday, Slovenia expects a modest recovery in May's retail sales, predicted at 1%, improving from a -0.30% decline. One of the biggest events this week is the CNB rate decision scheduled for Thursday, from which we expect a 25 basis point cut to 5%, reflecting moderate inflation risks for the latter half of the year. Friday will be the most release-heavy day of the week. Croatia will publish its CA balance for 1Q, industrial production and retail sales, which should maintain a robust growth footprint. Similarly to Croatia, Serbia is to release industrial production and retail sales figures for May; we expect a continuation of the steady industry performance and double-digit retail growth. Slovenia and Poland will show flash estimates of June inflation, with a deceleration expected in Slovenia and acceleration of inflation in Poland. Furthermore, Hungary is to publish unemployment and PPI figures, Slovakia PPI.

FX market developments

The Czech koruna underperformed its regional peers ahead of this week’s central bank meeting, at which another interest rate cut is broadly expected. While markets started to discount their earlier bets on a reduction of the key rate to or below 4% by the year-end, last week’s comments from the governor and vice-governor clearly indicated that both options - a 25bp rate cut and a 50bp rate cut - will be on the table. We see a 25bp cut as more likely and stick to our forecast that the central bank will continue with gradual cuts and bring the key rate to 4% by December, in line with the view of Vice-Governor Frait. The Polish zloty appreciated vs. the euro last week, benefiting from hawkish comments by MPC members. The Hungarian forint was on a rollercoaster last week, losing about 1% vs. the euro in the second half of the week and swiftly erasing its gains from the first half of the week. With the EURHUF approaching 398, the forint is getting closer to the upper bound of the central bank’s tolerance band.

Bond market developments

The recommendation of the EU Commission to initiate the Excessive Deficit Procedure (EDP) against seven EU members, including Hungary, Poland and Slovakia, due to their high fiscal deficits, had been expected and thus had a limited impact on yields and spreads. The final decision should be made by the Council, and afterwards, countries should follow either a 4-year or 7-year fiscal adjustment path in order to bring their deficits safely below 3% of GDP in a way that would prevent the debt ratio from increasing shortly afterwards. Last week, Romania saw relatively weak demand in the auction of its longest tenor (ROMGB 2038) and rejected all bids, which topped the planned volume only by a slim margin. The MinFin, however, borrowed RON 518mn and RON 500mn via reopening ROMGB 2027 and 2028, respectively. This week, Romania will be reopening ROMGBs 2026 and 2029, and Czechia reopens CZGBs 2033, 2035 and 2040. Hungary and Czechia will also offer T-bills.

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