CEE: Navigating Challenges as the Region Faces Economic Headwinds

CEE: Sinking beacon of hope

After a very busy calendar last week, this week we take a little break in the CEE region. The final December inflation numbers in Poland will be released today and core inflation tomorrow. We do not expect any changes in the headline rate and anticipate a drop in core from 7.3% to 6.9% year-on-year. On Wednesday, we will see PPI numbers in the Czech Republic, one of the last numbers before the February Czech National Bank meeting. Thursday will see the release of industrial production in Romania and PPI in Poland on Friday.

Otherwise, we will continue to monitor the dynamic political situation in Poland. The state budget draft for this year will be discussed this week in parliament. In the Czech Republic, we are getting closer to that CNB meeting and we should hear more from the board in the next two weeks before the blackout period begins. After surprisingly low inflation for December, there is the possibility of a rate cut of 50bp instead of 25bp, which is our base case scenario here for now.

CEE FX remains the last island of resistance within the EM space, which is under selling pressure this year. However, last week proved that the CEE region is not the exception and bearish sentiment has arrived here, too. The market is starting to price in more cutting than we expect, not only due to global direction but also inflation surprising to the downside. And even in Poland, where the central bank continues its hawkish tone, FX has not escaped losses. Despite the inflation surprise in the Czech Republic, we believe the koruna will remain resilient and should not go to the 24.700-800 range. On the other hand, Hungary's forint has been ignoring rapidly falling rates for some time, which we believe leaves HUF vulnerable, and we expect rather weaker levels this week above 380 EUR/HUF. Poland's zloty remains the only currency in the region supported by a higher interest rate differential. However, political noise seems to be entering the market and PLN is rather weaker. Therefore, we see EUR/PLN around current levels for the next few days despite positive market conditions.