Erste CEE Macro Comments

Analysts' views:

HU Rates: After 75bps of tightening since November, the Central Bank yesterday decided to leave rates unchanged at 6.00%, as  expected. The outcome is no surprise after the reassuring January CPI data and improved market sentiment (decreasing CDS spreads) in the past few weeks. Although the wording of the statement still states that, in the coming months, the Council will decide whether to raise interest rates again after considering upside risks to inflation, positive aspects of recent macrodata (moderate CPI and wage growth readings) were also strongly emphasized by the Governor. We expect weak domestic demand to have a favourable effect on inflation. In addition, the four new members (who will be 'de facto' appointed by the current government to the 7-member Council) are expected to pursue a more dovish monetary policy from March onwards. However, we do not think that the new Council can start to cut rates immediately especially as expect to see the start of monetary tightening in major markets soon. Thus, in the next few meetings the base rate is likely to be kept on hold but in 2Q-3Q this year, we see some room for a decrease of the base rate (to 5.75%).

RO MM and FX: The MinFin sold 1Y T-bills worth RON 959mn, less than planned at an average yield of 6.88%, up from 6.73% at the previous auction in February. Investors placed total bids worth RON 2.4bn with RON 1.5bn on offer. On the FX market, the RON strengthened to a five-month high of 4.224 amidst rumors of a possible intervention by the NBR. We remain bullish on Romanian assets and see 5Y yields at 6.8% and EURRON at 4.15 in September.

Traders' comments:

RON: The bond market was unmoved by the poor T-Bill auction result as money market rates remain under upward pressure and the RON appreciates.

HUF: The rate decision was widely expected and markets were underwhelmed.

PLN: Calm with slightly better buying interest across the yield curve. HRK: Croatian bonds are following bund prices up as the flight to safety kicks in.

CEE CDS: Whilst the SovX CEE was negatively impacted by the equity sell-off in the wake of the unrest in Libya, individual CEE names hardly budged.