Solid economic growth in the first quarter expected

This week, releases of flash GDP growth in the first quarter will be the key events in most CEE countries. We believe that, despite the outbreak of the war, the economies maintained a solid pace of growth at the beginning of the year, as indicated by the average growth of non-Eurozone countries at 5.6% y/y and 0.9% q/q. Having said that, the flash 1Q22 GDP may arrive as high as 8% y/y in Hungary and Poland. In Slovakia and Romania, the y/y growth dynamics are likely to be lower, between 2% and 3%. In Croatia, the inflation number in April (expected at 8.1% y/y) will be closely watched, also from the standpoint of the upcoming euro adoption. Furthermore, the April PPI index will be published in Czechia, Poland and Slovenia. For Slovakia, we expect the unemployment rate to drop marginally. Finally, in Poland, we get the first look at the second quarter data, as April industrial output growth will be published on Friday.

FX market developments

All eyes were on the Czech currency market over the last week. On Monday, the inflation rate in April surprised the market. On Wednesday, the nomination of Ales Michl (known for his dovish bias) to become the next Czech National Bank governor triggered a visible weakening of the Czech koruna, which required the central bank to intervene and reverse the roughly 2% depreciation against the euro on Thursday. The uncertainty about the monetary policy direction is likely to weigh on the Czech koruna in the near future, as three more board members will need to be named and the board composition may end up dovish. As for other CEE currencies, the Hungarian forint has depreciated, amid central bank comments that monetary policy is moving from aggressive to gradual. In Poland, Governor Adam Glapinski won parliamentary approval for a second, six-year term. The Polish zloty appreciated over the week,while the Romanian central bank is sticking to the de facto currency peg and continues to intervene on the FX market.

Bond market developments

We saw interesting developments on CEE bond markets last week, as 10Y Czech and Romanian government bond yields moved up 40-50bp w/w and in an opposite direction from government bond yields on major markets, which inched down 20-30bp w/w. In both countries, inflation surprised to the upside, providing some justification for the current trend of monetary tightening. However, the market reaction strongly differed in the details. The short end of the ROMGB curve increased substantially (2Y went up 110bp w/w), as more tightening is now expected (we have increased our estimate of the terminal key rate to 5.5-6.0% this year), but in Czechia the short end hardly moved; we thus saw bear steepening, via which the CZGB curve has become less inverted. This could be the result of the more dovish stance of newly appointed Governor Michl, who has been well known for his opposition to any monetary tightening, suggesting that elevated inflation could be tackled by the central bank less aggressively in the future and thus risking inflation remaining higher for longer.

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