While Czech financial markets were practically unaffected by the fall of the Government and the related risk of an early election, neither the koruna nor Czech bonds (not to mention stocks) could resist the global sale of assets, triggered by Fed Chief Bernanke. Nevertheless, investors holding Czech fixedincome may feel comforted by the fact that their losses are fairly moderate compared to those in Polish and Hungarian assets. Since Wednesday’s FOMC meeting, yields of Hungarian and Polish government bonds (i.e., swap rates) have surged by 40 and more basis points, while the forint and the zloty have weakened by more than 2%.
We wonder whether the current sell-off will have any substantial impact on regional policy makers – in particular the National Bank of Hungary and the National Bank of Poland. Both institutions are ready to help their respective economies by another rate cut, because inflation hovers at all-time lows there and its outlook is still favourable, given the poor domestic demand. Naturally, the threat of monetary tightening and the related rise in dollar interest rates, i.e., the capital outflows back to the US, does not favour such intentions. The question now is whether the sell-off of regional currencies and government bonds may frighten the NBP and the NBH enough to discourage them from further official rate cuts. For the time being, we believe that currency and bond losses have not reached such scale yet as to make us reconsider our bets regarding another rate cut by the NBH this week and by the NBP next month. However, like in many other areas, also here momentum matters – if asset prices in Poland and Hungary continue to fall at the current rate, we may even be ‘surprised’ by their central bankers preferring stable interest rates in order to maintain stability of domestic financial markets.