Central banks not rushing to tighten
Among CEE central banks, only the CNB gets hawkish; we expect two 25bp hikes delivered already this year. Central banks in Hungary and Poland will remain engaged in government bond purchases, which are likely to intensify in the next couple of months.
The pandemic crisis left a negative mark on public finances. Deficits climbed to 8% of GDP in CEE on average, while public debt to GDP ratios increased even more, by 11 percentage points on average last yer. Public debt ratios should stabilize or fall next year, except for in Czechia and Romania, which should keep their debt ratios well below 60% of GDP. CEE countries have managed to improve their debt maturity profiles while locking in relatively low borrowing costs. The average maturity was extended to 6.8 years as of end-March, from 6.2 a year ago.
The improved global economic outlook, which triggered reflation trades and moved yields higher on both global and emerging bond markets, left its mark on the CEE bond market as well. 10Y government bond yields went up 60bp in Czechia and Hungary compared to the beginning of year. Not all countries experienced an increase of yields in 1Q. In Croatia and Serbia, where inflation remained relatively muted, government bond yields even slightly declined. Among CEE central banks, only the Czech National Bank gets hawkish, although in the last couple of weeks it has started to downplay the urgency of hiking. We expect two 25bp hikes delivered already this year (in August and November). Base rates should remain on hold in other CEE countries this year, with the Hungarian central bank ready to increase the 1W deposit rate if needed.
Central banks in Hungary and Poland will remain engaged in government bond purchases, which are likely to intensify in the next couple of months, in order to prevent yields from any sharper increases triggered by reflation trades. The Romanian central bank has been using bond purchases only occasionally in small volumes so far as a backstop during ROMGBs sell-offs or periods of extremely low liquidity.