The Central and Eastern European (CEE) region is poised for a significant week, marked by a dense calendar of economic data releases and critical central bank policy decisions, according to an analysis by Frantisek Taborsky of ING. This period is expected to offer crucial insights into the evolving monetary policy landscape across the region, with ING forecasting a nuanced picture of inflation dynamics and policy responses. Hungary’s inflation is projected to see a marginal increase, while the National Bank of Poland (NBP) and the Central Bank of Turkey (CBT) are widely anticipated to maintain their current interest rate levels. In contrast, Romania is expected to report a substantial deceleration in its inflation rate, primarily driven by favourable base effects. A key contention raised by Taborsky is that financial markets appear to be overpricing the likelihood and extent of further monetary tightening in the Czech Republic and Poland. This perceived mispricing, ING suggests, could lead to a narrowing of interest rate differentials and exert moderate downward pressure on CEE currencies, particularly against the Euro, with specific attention on EUR/CZK and EUR/PLN pairs.

A Packed CEE Economic Calendar Takes Centre Stage

As the new month commences, the CEE region’s economic calendar is exceptionally busy, setting the stage for a series of data releases that will inform central bank decisions and market sentiment. The week initiated with the release of July industrial production data for both the Czech Republic and Hungary, providing an initial gauge of manufacturing sector performance amidst varying external and internal demand conditions. These figures are vital indicators of economic health, reflecting industrial output and capacity utilisation, which often precede broader economic trends.

The focus then shifts to inflation, a persistent concern for many global and regional economies. On Tuesday, Hungary is slated to publish its August inflation figures. ING anticipates a slight uptick in the annual inflation rate, projecting it to rise from 1.2% to 1.4%. This expected increase follows several months of disinflationary trends in the Hungarian economy, a period where price pressures had shown signs of easing. The slight reversal, if confirmed, will be closely scrutinised for its implications on the Hungarian National Bank’s (MNB) future policy trajectory, particularly as the central bank navigates its balance between supporting economic growth and maintaining price stability. Hungary’s economic context includes a period of robust fiscal stimulus measures and a relatively tight labour market, which could contribute to underlying inflationary pressures even as headline figures fluctuate. The MNB has previously embarked on aggressive tightening cycles to combat high inflation, making any re-acceleration a point of concern for policymakers.

Central Bank Decisions: A Week of Anticipated Holds

The latter half of the week is dominated by crucial central bank meetings, with the National Bank of Poland (NBP) and the Central Bank of Turkey (CBT) scheduled to announce their latest policy decisions.

On Wednesday, the National Bank of Poland is widely expected by ING to maintain its benchmark interest rate at 3.75%. This forecast aligns with the prevailing market consensus that the NBP will remain on hold for the remainder of the year. The central bank’s stance has been notably dovish, particularly following Governor Adam Glapiński’s remarks in July, which suggested a cautious approach to further tightening. This dovish pivot came despite a recent re-acceleration in Poland’s inflation over the past two months. The NBP’s current strategy appears to prioritise stability and assess the lagged effects of previous tightening measures, which saw the bank raise rates significantly earlier in the cycle to combat surging inflation. The decision to hold rates constant, even in the face of rising inflation, effectively signals a temporary closure of the door to a near-term rate hike, reinforcing the bank’s commitment to its current accommodative stance. Analysts will be keen to dissect any accompanying statements for clues regarding the NBP’s longer-term outlook and its reaction function to evolving inflation dynamics and economic growth projections. Poland’s economy, one of the largest in CEE, has demonstrated resilience but also faces headwinds from global slowdowns and energy price volatility.

Thursday will bring the Central Bank of Turkey’s interest rate decision. ING believes the CBT is likely to keep its policy rate unchanged at 37%. This anticipated hold comes after a period of aggressive rate hikes under the new leadership, aimed at combating persistently high inflation and stabilising the Lira following years of unconventional monetary policy. The CBT recently restarted repo auctions two weeks prior, a move that effectively lowered the market’s effective interest rate. This action suggests a period of consolidation, where the central bank is likely to pause and assess the impact of its recent tightening cycle and liquidity operations before considering any further adjustments to its policy stance. The Turkish economy continues to grapple with complex challenges, including high inflation, external imbalances, and significant currency volatility, making each CBT decision highly impactful for both domestic and international investors. The central bank’s credibility and commitment to orthodox monetary policy remain under intense scrutiny.

Concluding the week’s data releases, Romania is set to publish its August inflation figures on Friday. ING forecasts a significant decline in the annual inflation rate, predicting it to fall sharply from 8.2% to 6.5% year-on-year. This substantial deceleration is primarily attributed to favourable base effects, where the comparison is made against a period of unusually high inflation from the previous year. While monthly price growth may show some acceleration, the year-on-year figure is expected to benefit from this statistical phenomenon. The National Bank of Romania (BNR) has been actively managing inflationary pressures, and a significant drop in the headline rate could provide some room for manoeuvre, although the central bank is likely to remain vigilant regarding underlying price pressures and wage growth. Romania’s economic performance has been robust, but it too faces the broader regional and global challenges related to energy costs and supply chain disruptions.

Czech Republic: CNB’s Dovish Tone vs. Market Aggression

In the Czech Republic, a key development this week is the commencement of the Czech National Bank’s (CNB) blackout period on Thursday. This period, preceding a monetary policy meeting, restricts public communication from central bank officials to ensure an orderly and unbiased decision-making process. Consequently, market participants will be keenly observing any final statements or headlines from the CNB’s bank board in the days leading up to the blackout. ING anticipates that the CNB will adopt a more dovish tone compared to the aggressive hawkish pricing currently embedded in market expectations.

The CNB has historically been one of the most proactive and hawkish central banks in the CEE region, initiating rate hikes early and aggressively to combat inflation. However, recent global and regional developments, coupled with signs of a slowdown in domestic economic activity, may be prompting a shift in the bank’s rhetoric. Markets have been pricing in approximately 80 basis points (bp) of further tightening in the Czech Republic, a level that ING deems excessive. This divergence between market expectations and ING’s view on the CNB’s likely stance underscores the potential for significant market adjustments in the near future. The Czech economy, heavily reliant on manufacturing and exports, is particularly sensitive to external demand fluctuations, and a hawkish monetary policy could further dampen growth prospects.

Rates Repricing to Weigh on CEE FX: A Deeper Dive

The regional bond markets experienced a notable rally last week, spurred by a global relief rally that followed easing concerns about aggressive monetary tightening by major central banks like the European Central Bank (ECB) and the US Federal Reserve. This global shift translated into reduced expectations for rate hikes in both the Czech Republic and Poland. Despite this initial recalibration, financial markets continue to price in around 80bp of tightening for both countries. ING’s assessment unequivocally labels this level of market pricing as excessive.

The implications of this perceived overpricing are significant, particularly for currency markets. A further unwinding of these aggressive tightening bets, driven by a more dovish reality from the central banks, is expected to lead to a narrowing of interest-rate differentials. Interest rate differentials represent the difference between the interest rates offered by two countries. A higher differential typically attracts capital inflows, strengthening the currency of the country with higher rates. Conversely, a narrowing differential, especially if the local central bank is perceived as less hawkish than previously expected, tends to reduce the attractiveness of that country’s assets, leading to capital outflows and a weakening of its currency.

Consequently, ING forecasts a moderate weakening of CEE currencies. Specifically, the analysis points to upside risks for EUR/CZK, suggesting the Euro could strengthen against the Czech Koruna. Unless the CNB delivers an unexpected hawkish surprise this week, the pair could move back above the 24.250 level. The Czech Koruna has been a relatively strong performer in the CEE region, supported by the CNB’s aggressive tightening cycle. However, if the central bank signals a more dovish path, the Koruna’s strength could be challenged.

Similarly, EUR/PLN also appears to have reached a local low, according to ING’s assessment. The pair could experience an upward trajectory if the National Bank of Poland maintains its dovish bias, particularly in the face of higher inflation. The Polish Zloty has also seen periods of appreciation, but a sustained dovish stance from the NBP, contrasting with market expectations of a potential reaction to rising inflation, could lead to a repricing and weaken the Zloty against the Euro. Investors will be closely watching NBP’s communication for any subtle shifts in tone or forward guidance.

Broader Regional Outlook and Investor Sentiment

The week’s events are set against a backdrop of complex economic conditions across Central and Eastern Europe. While inflation remains a primary concern, the region also faces the dual challenge of sustaining economic growth amidst a global slowdown and geopolitical uncertainties. Energy prices, supply chain resilience, and the ongoing conflict in Ukraine continue to cast long shadows over the economic outlook for these economies, which are often highly integrated into the Eurozone supply chain.

The varying approaches to monetary policy across the region highlight the diverse economic structures and specific challenges faced by each country. While some central banks, like the NBP, appear to be prioritising stability and assessing past actions, others, like the CNB, are navigating market expectations that diverge significantly from their potential future path. The Central Bank of Turkey’s efforts to re-establish credibility through orthodox policies add another layer of complexity to the regional picture.

For international investors, the CEE region remains an attractive, albeit volatile, destination. The expected repricing of interest rate expectations and the potential for currency adjustments underscore the need for careful risk management and a nuanced understanding of each country’s specific economic and policy landscape. The coming week will undoubtedly provide critical information that will shape investor sentiment and capital flows within this dynamic and strategically important part of Europe. The interplay between inflation data, central bank rhetoric, and market positioning will dictate the immediate direction for CEE economies and their currencies.