Central European markets welcomed the money-printing boost in the US and the forint touched the key level of 281/€, which is near the strongest levels since the eurozone crisis start a last year. Still alive expectations for an agreement with the IMF and low budget deficit target of 2.5% of GDP helped investors to remain optimistic about the outlook, although Hungary is getting closer to the 2014 elections and the 2013 budget looks to have 2% of GDP gap.
The bond market and the interest rate curve also lowered some 5bps, hence rate cut expectations of further 75bps over the next 9-months has not yet changed, because the currency is still in strengthening mode. NBH President András Simor said that an IMF deal could cut Hungary’s risk cost substantially and the current drop in CDS prices may prove to be unsustainable. He added that a weaker forint would not boost exports significantly and it is senseless to cut rates disregarding inflation. That only confirms the prevailing disagreement on the NBH board.
Meanwhile the Polish inflation declined as we expected and is at 3.8%. The decline was driven mainly by cheaper clothes and food. We continue to believe in rate cut as soon as in October, but we want to see further slow-down in August industrial output to confirm our October call.