Growth recovery to support CEE currencies, CZK keeps the cap
Hungarian real GDP grew by 3.5% y/y in Q1 14 - well above the consensus forecast of 2.7% y/y. In Hungary right now, there are some nice combinations - no inflation and stronger economic activity. Even though today's GDP number came out much stronger than we expected and feel a bit 'too good to be true' and it is quite likely that the number will come under some revision going forward, it nonetheless indicates that the economic recovery is intact and perhaps still somewhat stronger than expected in general. This bodes well for our new HUF forecast, in which we expect the HUF to appreciate moderately on all forecast horizons. However, we do not expect any stronger appreciation pressures given that the MNB will still ease monetary policy going forward in order to avoid deeper deflation.We continue to think that Hungary's fairly strong external position is likely to be supportive for the HUF in the medium term as will the increasingly stronger recovery in growth. As a consequence, the HUF could even strengthen moderately against the EUR on a 12-month horizon, while the short-term outlook is likely to be dependent on the general emerging markets' outlook as well as developments in the Russian-Ukrainian conflict.
Same story in Poland as in Hungary
The pick-up in Polish growth could potentially push the Polish central bank (NBP) in a slightly more hawkish direction. However, the Ukrainian crisis is certainly helping moderate this hawkishness and more importantly, the latest inflation data shows that it remains well-below the NBP's official inflation target. Indeed, there is a risk of outright deflation in Poland in coming months. This, combined with the potential for monetary easing from the ECB, could mean that the NBP will keep its key policy rate unchanged until the end of the year and probably well into 2015.
Despite the preliminary Czech Q1 GDP number confirming a continued recovery in the economy, it was nonetheless a bit of a disappointment for us. The release showed Q1 14 GDP growth of 2%, which was an acceleration versus 1.2% y/y from Q4 13 but below consensus of 2.4% y/y. Somehow, we hoped that weakening the currency through direct market intervention and the set-up of the EUR/CZK floor at 27 would have a somewhat greater effect on the economy. However, we have also argued that the Czech central bank should have been much more aggressive.
A moderate recovery and low inflation means that the CNB will maintain the EUR/CZK floor going forward. We no longer believe that the CNB can lift the floor higher in order to bring inflation back to target quicker and reassure a swifter recovery. Instead, we expect the CNB to maintain the koruna cap for longer, beyond Q1 15. This means that we will not see any big moves in the EUR/CZK going forward. We expect the EUR/CZK to hover around 25.50 in all forecast horizons.
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