Analysts’ views: 

RO IMF: In a recent interview, chief of the IMF/EU review mission for Romania, Jeffrey Franks, called for prudence over further monetary policy easing, urging the NBR to keep a close eye on inflation.. Although we currently see the 5.5% level of the key rate as appropriate, considering not only the jittery international context but also domestic risks, we do not rule out a continuation of the easing cycle in 1H12 (another 25bp cut in the key rate to 5.25%). Even though we too expect inflation to hit new record lows in the first half of this year (which is in line with the central bank’s view for 1H12), it is worthwhile reiterating that a further slowdown of inflation will mainly be the result of a favourable base effect in 1H12 while the monthly rates of inflation could be elevated. We see EURRON at 4.32 by Dec-12. 

HU Macro: The spring session for the Parliament will be opened today with a change to the criticized laws which are the prerequisite for restarting negotiations about funding from international financial institutions at the forefront of most observers minds. However, these issues are not expected to be on the agenda in the Parliament this week. MP Antal Rog?n said on Saturday that it would be beneficial if first the European Commission in Brussels forms an opinion on the bills and they then go to parliament after that. He added that an agreement with the EU is possible on the three issues and Hungary could start formal talks with the European Union and the IMF in early March with an agreement being reached by the middle of the second quarter. We expect bond yiels to correct upwards from here towards 8.8% and the HUF to weaken to around EURHUF 300 before resuming a strengthening trend in the summer.  

Traders’ comments: 

CEE Fixed Income: CEE capital markets were unsurprisingly tense going into the weekend, ahead of the parliamentary vote in Greece. Even though the probability of a vote against the revised austerity package was low, it was nonnegligible and the negative consequences would have been enormous. As such, liquidity dried up as some market participants decided to take some chips off the table. This was compounded by weaker than expected consumer confidence in the US but the magnitude of the moves suggests that confidence in CEE markets remains intact. Indeed, international accounts were taking advantage of jumpy local sellers, buying on dips in Polish Eurobonds, which helped contain the sell-off. Hungary, as one would expect, was the underperformer but more telling with respect to underlying sentiment were opportunistic buyers in Croatian Eurobonds and the drop in yield at the shortend of the Romanian Eurobond curve. That said, given the severity of a sell-off that a no-vote would have generated, there was no real safe-haven bid in CEE with Czech bond yields also up by 5 – 9 bps following an overhang on the offered side. Another sign of the relative resilience in CEE was seen in the derivatives. The XOver widened 30 bps on Friday, the SovX CEE only 7 bps. Early indications are that CEE will benefit from the relief that the Greek parliament passed the budget on Sunday. CEE FX are already stronger this morning, led by quite a large move in CZK. A tightening of 17 bps in the XOver bodes well for the SovX CEE. Statements from Gergely Gulyas, a leading Hungarian lawmaker, that changes to legislation demanded by the European Union’s executive will be enforced by March, will likely also support a rebound in today’s trading session.

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