Erste Group: CEE Macro/Fixed Income Daily
September 27, 2012
CZ Rates: The CNB holds a rate-setting meeting today. We expect the repo rate to be cut by 25 bps to 0.25% and the non-standard measures to be discussed but not approved. Why and why? For the full story, see our Macroscope, but briefly our case is as follows. Regarding the former, it is because the economy is (and is likely to stay) devoid of any inflationary pressures, this being due to the relatively stable CZK, general uncertainty and fiscal restriction crippling household demand. As the government plans yet more fiscal restrictions and the debt crisis is far from being resolved, it’s hard to see why this should change. Also, as we detailed in a “Shortnote” last week, the peculiarities of the local banking sector preclude any QE action from the CNB with a tangible effect on the ground. We expect 10y benchmark bond yields to rise to 2.70% by year end.
RO Rates: Today, the NBR will likely keep the key rate unchanged at 5.25% due to inflationary concerns and external pressures on the RON. We also think that minimum reserve requirements will remain unchanged for both the RON and FX. Our current inflation forecast is 4% for December 2012 but we could revise it upwards to around 4.2% due to higher food prices and hikes in administered energy and urban transport prices. Inflation could overshoot the NBR’s target of 3%±1pp in September and remain above the target until 3Q13. A rate hike is not completely ruled out in 2013, but our main scenario is that the NBR will tighten its control of liquidity through its open market operations with the objective of keeping the 3M ROBOR at around 6% in the coming quarters. Our EURRON forecast is 4.55 in December 2012 with risks coming from the political environment.
PL Rates: NBP Governor Marek Belka announced that monetary easing will take the form of a rate cut cycle rather than an abrupt and sharp change in the level of policy rates. He added that the council would discuss the timing and pace of the cuts but he did not commit to undertake such a move at the next meeting. There are a number of members within the MPC who would prefer to wait for the November macro-economic projections before voting for a cut. The weak economy, however, supports the dovish members, who are slowly becoming a majority on the council, especially as Gilowska (considered a hawk) will be absent due to health problems. This substantially increases the odds of a cut in October. We expect one 25bp cut in November followed by further cuts in 1H13.
CEE Fixed Income: Tensions have resurfaced in Spain with police and protesters clashing on the streets. These images in the media, coupled with fresh calls for secession in Catalonia, have occurred in conjunction with generally weaker equity markets globally. The effect on CEE fixed income was concentrated in the CDS markets where sovereign CDS widened across the board. Elsewhere, cash bond markets were largely unmoved as liquidity dried up. FX markets were also range-bound. All in all, most market participants appear to be sitting on their hands at the moment and the street is leaning towards a less accommodative stance, resulting in wider spreads for choice and less liquidity. That said, the underlying tone amongst real money investors seems to be relatively complacent. We do not see too many requests for bids and still get lifted regularly in CEE cash corporates.