Rates will go up faster this year
With inflation easing but not fading away next year, policy normalization will remain the key driver of CEE bond markets. All but two of regional central banks began to tighten monetary conditions already this year. Frontloading of tightening should limit future yield increases.
The quick rebound of economic activity, accompanied with high inflation readings, paved the way for earlier normalization of monetary policy in CEE. That left its mark on bond yields, which increased visibly in all CEE countries outside of the Eurozone. Croatia is the only CEE economy where 10Y yields dropped, as the country is coming closer to becoming a member of the Euro Area (likely in January 2023).
All regional central banks except for the National Bank of Serbia and the National Bank of Croatia began to tighten monetary policy amid surging inflation and worries about second-round effects. Upcoming rate setting meetings in Czechia (November 4) and Romania (November 9) might bring more aggressive hikes than initially anticipated. In our view, the CNB might add another 50bp and move the repo rate to 2.0% at the beginning of November. Within our current forecast, we expect the repo rate to reach 2- 2.25% at the end of this year and 2.50% at the end of next year. The National Bank of Romania is expected to also hike by 50bp to 2.0%. In Poland we see the key rate at 1.25% at the end of next year and we expect the National Bank of Serbia to deliver its first quarter point hike to 1.25% in 1Q22. Given Croatian participation in the ERMII and aspirations to soon join the Eurozone, the local central bank remains on hold.
We expect 10Y government bond yields to drift up only about 10-20bp next year from current levels, as inflation is to moderate considerably after 1Q22. We can even see some yield correction in Czechia and Hungary once inflation passes the peak, or narrowing of Romania’s twin deficits (in 2H22).