CEE economies likely to witness declining real interest rates in upcoming quarters

The Central and Eastern European (CEE) economies are expected to witness declining real interest rates in the upcoming quarters. Romania seems to be in the spotlight, as the country might approve plans to convert CHF loans at historical levels today, which sent the EUR/RON to multi-month highs last week.

Besides this, S&P maintained the rating at ‘BBB-‘, with a stable outlook on last Friday. It is also important to watch Croatia this week, as the media reported that the new government could boast a much larger majority in the Parliament than expected earlier, which could potentially give a boost to Croatian assets.

Although price increases are expected to speed up in the coming months in CEE, mostly due to base effects, we do not think that rates and yields should follow suit too much. Although inflation is unavoidably going to increase in the coming months, yields and rates are not expected to increase at a similar pace, if at all, ERSTE Group reported.

The still accommodative policy in the ECB and improved external resilience of CEE (which makes countries there much less vulnerable to a tightening from the US Fed) could dampen any possible upside pressure on bond yields or rates. As for inflation, the expected increase only means that the figures could be closer to inflation targets (mostly at the lower bounds) of central banks in the region.

Although local labor markets are showing evident signs of tightening (most notably in Hungary, in our view), while subsequent wage increases are much stronger than productivity increases this year, a great deal of disinflationary pressure is still being imported from the Euro Area. Therefore, some central banks (mainly the MNB in Hungary) are still considering further easing.

Meanwhile, the Serbian central bank could also be in a position to ease further, although the policy rate stands at 4 percent there and the expected size of the easing is not too large compared to this level.