Two more central banks meet this week

The economic release calendar for this week starts on Monday, with Hungary reporting its final trade balance for April. Romania follows on Tuesday July 2 with its May unemployment rate, last recorded at 5.30%, and the Producer Price Index. Croatia will release preliminary inflation data for June on the same day, with our estimate of 2.70% indicating a continued downward trend in inflation. The first central bank meeting this week will conclude on Wednesday, when the NBP announces its rate decision; it is expected to maintain the current 5.75%. Moreover, a new round of forecasts for the Polish economy will be published. Slovakia's Retail Sales for May are anticipated on July 4, with an estimate of 6.50% growth. On Friday, Romania is expected to reduce its key rate by 25bp to 6.75%, as fiscal risks and strong wage growth have delayed the cut in May. Romanian Retail Sales for May are also due, with a growth estimate of 6.60%, supported by strong real wage growth. Hungary's Retail Sales for May are expected to show a modest recovery, with a y/y increase of 3.90%, reflecting improved consumer confidence and positive real wage trends.

FX market developments

In a surprising move last week, the CNB reduced interest rates by 50bp, bringing the principal rate down to 4.75%. The market had largely anticipated a more modest cut of 25bp. The CNB's decision, wavering between a 25- and 50-point cut, appears to have been influenced by the belief that the existing rate was excessively high in relation to projected inflation, thus negating any rationale for postponement. Despite this unexpected move, our medium-term forecast remains unchanged. We maintain our projection of the CNB’s principal rate at 4% by year-end, with potential upward risks of 4.25% or 4.50%. As a result of the decision, the Czech koruna slightly depreciated and went above 25 against the euro. Over the last week, other CEE currencies remained relatively stable, except for the zloty, which appreciated below 4.30 at the beginning of the week, reverting some of the gains as the week progressed.This week, locally, central banks in Poland and Romania keep the rate setting meeting and Romania should begin monetary easing. Global developments such as flash inflation in the Eurozone and snap elections in France may also influence the FX market in the region.

Bond market developments

The CEE bond market entered the summer season with very limited movement. Issuance is also expected to calm down in the next couple of months, as six CEE countries have already completed over 70% of their 2024 net issuance by the end of June. Croatia is preparing to place 3-year and 10-year bonds in the coming weeks, aiming to raise EUR 2bn. The first issuance will primarily target retail investors (approx. EUR 750mn), while the 10-year paper (about EUR 1.25bn) will be offered to institutional investors. After placing these bonds, Croatia will have completed 2/3 of its gross issuance, leaving only EUR 1bn to borrow for the remainder of the year.

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