Bancherul - BANCI / ENGLISH / Raiffeisen Research: CEE Weekly Bond Markets Outlook

Inside the CEE Weekly Bond Market issue (SEE the document attached):

Poland – The decision to raise interest rates by 25bp and especially the hawkish wording thereafter helped EUR/PLN to strengthen towards 3.95. The monetary council seems to favour more monetary tightening in the coming months, supporting our interest rate outlook of 4.5% by year-end 2011. Latest CPI data was above consensus estimate at 4.3% yoy sparking discussion about a possible 50bp interest rate hike in May.

Hungary – CPI inflation for March (4.5% yoy) surprised on the upside, due to rising energy and food prices. It is still an open question how the price increases will spill over to other products in the coming months. The Monetary Council members should press the hold button next Monday and the following months as well, while monitoring price developments in the upcoming period.

Czech Republic – The government coalition fell into a deep crisis. Prime Minister Petr Necas of the Civic Democrats (ODS) proposed that President Klaus should dismiss Public Affairs party (VV) ministers Radek John (interior, VV chair) and Josef Dobes (education), Minister Barta resigned and a resignation was offered by Minister Alexandr Vondra (defence, ODS).

Romania – The monthly inflation rate was high in March (+0.6% mom), coming in above market expectations (+0.4% mom in the Reuters poll), with higher food prices (+1.2% mom) and fuel prices (+2.3% mom) as the main drivers. Leu appreciation pushed down phone tariffs (-1.8% mom), thereby limiting the advance in the overall CPI. The annual rate of inflation climbed to 8% yoy in March.

Croatia – Consumer price growth continues to accelerate: in March, prices rose 2.6% yoy and 0.8% mom, pushed mainly by cost inflation, while domestic demand remains slack. Apart from components directly linked to higher oil prices, the strongest driver of inflationary pressures is food and beverages. In the months ahead, we expect further acceleration of consumer price growth.

Russia – The IMF experts forecast Russia’s fiscal deficit to narrow to 1.6% of GDP this year. The original budget law for 2011 puts the deficit at 3.6% of GDP. Earlier, Russia’s finance minister expressed similar optimism expecting the budget deficit to drop to 1.0-1.4% of GDP, provided that the oil price remains at 105 USD/bbl. Rouble market profit-taking was mainly linked to bearish European stock markets and the desire of local stock market players to cash profits. However, we expect the market correction to be short-lived.

Turkey – Next Thursday on April 21, the central bank will hold its next monetary council meeting and decide on the benchmark rate, which is currently 6.25%. We think that the rate will be left unchanged. In addition, the term of central bank governor Yilmas ends quite soon, on April 18. Turkish president has already approved the nomination of CBT deputy head Erdem Basci as a successor. Basci is seen as a good choice and we do not expect much change in monetary policy. Markets did not react much to the nomination.