Forint at eight-month lows

 - CNB will keep rates unchanged
 - Forint at eight-month lows

The Hungarian forint maintained its outstanding performance (it has strengthened in 6 out of 7 recent sessions) and the EUR/HUF cross rate therefore hit another eight-month low on Wednesday. Meanwhile, its CE peers slightly weakened. Regarding the Czech bond auction, demand for both fixed and float rate bonds was exceptionally strong (bid-to-cover ratio reached 2.9 and 3.8 respectively). We believe that it (at least partially) reflects market’s trust in austerity measures undertaken by the Czech government.
As for today’s calendar, the Czech National Bank’s (CNB) rate decision is due to early afternoon. We expect no surprise and believe that the CNB will keep interest rates unchanged (let us remind that it’s been two years since the CNB cut interest rates by 25 basis points; since then, interest rates are flat), although inflation is seen well above the target. However, the Czech headline inflation is driven purely by factors that are behind the reach of the central bank (VAT hike, deregulation of rents, high commodities prices…) whereas domestic demand pressures remain muted. Therefore, we expect that the CNB might increase interest rates in about a year, should the state of the Czech and European economy improve.