Monday, 25 July 2016

Dear clients, due to a regular summer break- the next CEWeekly will be released on August 29th.

P. 1

Strong hard data in Poland in June

Probability of a latter CNB’s exit from FX interventions

declines with solid PMIs in the euro-zone

The NBH on hold this time

The short-end of the Hungarian yield curve dived following the announcement of new policy measures from the NBH.

Chart of the Week: Polish private consumption

Weekly Highlights: Table of contents

Weekly Highlights: 1 Chart of the Week: Polish private consumption 1 Central Banks & Markets 2 Review of Economic Figures 3 Weekly preview 4 Calendar 4 Fixed-income in Charts 5 Medium-term Views & Issues 6 CBs’ Projections vs. Our Forecasts 7 Summary of Our Forecasts 8 Contacts 9

Monday, 25 July 2016

P. 2

Probability of a latter CNB’s exit from interventions declines

Following the Brexit vote the EUR/CZK pair has hovered just

above the intervention floor set by the Czech National Bank

(EUR/CZK 27.00). So in fact the Czech currency has been

trading at the strongest levels allowed by the central bank

FX policy. There are two reasons explaining the strength of

the CZK: first, Czech fundamentals remain strong and

secondly, financial and economic contagion from the Brexit

vote has been negligible so far.

Recall that according to the preliminary estimate, the euro

zone composite PMI weakened only marginally in July, from

53.1 to 52.9. The outcome was well above the market

consensus of 52.5. The same picture has delivered the

German Ifo this morning as it has confirmed that the

business sentiment deteriorated less than market expected

in June. So overall, it seems the German/euro area economy

continues to grow at a moderate pace at the start of the

third quarter, suggesting that the UK decision to leave the

EU is having limited impact on activity for now.

Hence, the recent business sentiment reports prove some

resilience of the Eurozone. Based on the resilience, the ECB

does not need to start thinking about imminent expansion

of monetary easing, which in the Czech case implies that the

likelihood that the CNB decides to extend its FX

interventions commitment (to defend the EUR/CZK floor)

has been reduced. We assume the probability that the CNB

commitment will be extended beyond the mid of 2017 to be

around 30% at the moment..

LastChange

1W

EUR/CZK 27.0 0.07%

EUR/HUF 313 -0.73%

EUR/PLN 4.36 -0.21%

LastChange

1W

10Y CZK 0.56 23.08

10Y HUF 1.98 3.53

10Y PLN 2.27 2.03

4.28

4.30

4.32

4.34

4.36

4.38

4.40

4.42

4.44

4.46

4.48

6/1

4/1

6

6/2

1/1

6

6/2

8/1

6

7/5

/16

7/1

2/1

6

7/1

9/1

6

EUR/PLN

309.00

310.00

311.00

312.00

313.00

314.00

315.00

316.00

317.00

318.00

6/1

4/1

6

6/2

1/1

6

6/2

8/1

6

7/5

/16

7/1

2/1

6

7/1

9/1

6

EUR/HUF

Central Banks & Markets

Monday, 25 July 2016

P. 3

Very strong Polish hard data in June

Lats week, there were quite positive releases coming from

the Polish economy. The firts set came from the Polish

labour market, which looks quite healthy bow. While

corporate wages grew strongly by 5.3% y/y in June (in real

terms by more than 6%), the employment edged up by 3.1%

y/y.

Secondly, retail sales showed really strong gains in June as

they increased by 6.5 % Y/Y in real terms. Moreover,

industrial production figures also came out in line with

(strong) expectations. It grew by 7.2% year-over-year.

The above mentioned hrad figures (for June) mean that the

growth of overall labour income has accelerated, which

should support domestic private consumption and

economic growth in Poland.

The Czech public debt on the rise

At the end of the first half of the year, the Czech Republic’s

debt reached almost CZK 1.7tn. This was CZK 18 bn more

than at the end of last year and CZK 3 bn less than in the

first quarter. Thus, after using up the cash reserves

accumulated by previous governments (which, inter alia, led

to a decline in the state debt in the previous two years), the

government has evidently returned to a borrowing policy.

After all, if the Parliament approves a fairly high state

budget deficit even at a time of an economic upturn and

record employment, there is nothing else to be done.

While the state posted a surplus in the first half of the year,

it still needed tens of billions of crowns to redeem mature

bonds, which were replaced with new ones. Nevertheless,

we should not criticise overmuch as financial market

conditions are so favourable that they are literally

encouraging faster bond issues. Therefore, it would be no

great surprise to see the Ministry of Finance build up koruna

cash reserves for the future, all the more so because the

times are favourable for issuing bonds at negative yields.

The direction of the Czech Republic’s debt in the second half

of the year will largely correspond to the state budget

performance. Although the budget still remains in surplus, it

is likely to go into deficit in the autumn. However, if the

state’s fiscal policy remains moderate – as it has been so far

– the deficit may be much lower than originally approved by

the Chamber of Deputies.

This would certainly be quite a good signal, which would not

at all threaten the still-expansive fiscal policy at a time when

the economy is faring well, unemployment is rapidly falling,

and employment is hitting all-time highs. If this is combined

with the increasing standard of living and positive consumer

mood, leading to record-breaking shopping at stores, the

economy does not need any strong additional debt stimuli.

In any event, it will be interesting to see how the structural

deficit of public budgets will develop, as this deficit is likely

to deteriorate this year despite the decent overall figure.

This deficit indicates that all of those positive data

overshadow structural problems that will surface when the

performance of the economy may not be that good. And, as

usual, the longer the economy prospers, the closer it

approaches another recession.

0

5

10

15

20

25

30

35

40

45

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Q1

20

16

Q2

% o

f G

DP

CZK

bn

CZ: Central government debt

CZK bn (l-h-s) % of GDP (r-h-s)

Review of Economic Figures

Monday, 25 July 2016

P. 4

TUE 14:00

rate level (in %) 0.90 5/2016

change in bps 0 -15

This

meeting

Last

change

NBH base rate

HU: The NBH on hold this time

The National Bank of Hungary can be satisfied with the outcome of its

last measure, which has reduced commercial banks’ access to depo

operations, thus improving demand for the other instruments and

consequently cutting Hungary’s market interest rates. As a result,

there will be no need to change official interest rates – all the more so

because the Brexit fallout has proved to be negligible and no central

bank except the Bank of England is likely to react to it..

Date

07/25/2016

07/26/2016

07/28/2016

07/28/2016

07/29/2016

07/29/2016

08/01/2016

08/01/2016

08/01/2016

08/01/2016

08/05/2016

08/05/2016

08/05/2016

06/2016

07/2016

07/2016

07/2016

50.9

51.8

%

-2.2

07/2016

Previous

y/y

06/2016

9.6

8.7

m/m y/y

0.90.9

1.2

9:00

y/y m/mm/m

Consensus

9.1

Unemployment rate

PL 15:00

%

%HU 14:00 NBH meeting

PL 10:00 Unemployment rate

08/01/2016

08/02/2016

08/03/2016

Budget balance

%

PLN M

06/2016

06/2016

Indicator PeriodForecast

Country Time

HU

% 07/2016 *P

5.55.4

-13483

40.6

0.2 -0.8

CZK B

0.05

07/2016

755

HU 9:00 Retail sales % 06/2016

EUR M 05/2016 *F

5.7

HU 9:00

HU 9:00 Industrial output % 06/2016 -0.7 4.2

HU 9:00 Trade balance EUR M 06/2016 *P

CZ 13:00 CNB meeting %

11.19:00 Retail sales % 06/2016CZ

CZ 10:00 Money supply M2

08/2016 0.05

PL 14:00 CPI

Trade balance

CZ 14:00 Budget balance

08/04/2016

9:00 PPI % 06/2016

51.8CZ 9:30 PMI manufacturing

PL 9:00 PMI manufacturing

HU 9:00 PMI manufacturing

HU

Weekly preview

Calendar

Monday, 25 July 2016

P. 5

Source: Reuters

0.0

0.1

0.2

0.3

0.4

0.5

0.6

2Y 4Y 6Y 8Y 10Y

%

CZ IRS

25/07/16 18/07/16

0.0

0.5

1.0

1.5

2.0

2.5

2Y 4Y 6Y 8Y 10Y

%

HU IRS

25/07/16 01/12/14

1.40

1.50

1.60

1.70

1.80

1.90

2.00

2.10

2.20

2.30

2.40

2Y 4Y 6Y 8Y 10Y

%

PL IRS

25/07/16 18/07/16

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

10/1

9/1

5

11/1

9/1

5

12/1

9/1

5

01/1

9/1

6

02/1

9/1

6

03/1

9/1

6

04/1

9/1

6

05/1

9/1

6

06/1

9/1

6

07/1

9/1

6

%

FRA 3x6

Slovakia

Czech Republic

Poland

Hungary

0

1

1

2

2

3

3

4

4

5

5

10/9

/15

11/9

/15

12/9

/15

1/9

/16

2/9

/16

3/9

/16

4/9

/16

5/9

/16

6/9

/16

7/9

/16

%

10Y GB Yields

Czech Republic

Poland

Hungary

020406080

100120140160180200

10/1

9/1

5

11/1

9/1

5

12/1

9/1

5

1/1

9/1

6

2/1

9/1

6

3/1

9/1

6

4/1

9/1

6

5/1

9/1

6

6/1

9/1

6

7/1

9/1

6

bp

s

CDS 5Y

Slovakia

Czech Republic

Poland

Hungary

Fixed-income in Charts

Monday, 25 July 2016

P. 6

The Czech Republic Hungary Poland

Gro

wth

& k

ey is

sue

s

The Czech economy entered a stage of

moderately decelerating growth, at the

mercy of household consumption and

exports. Inflation remains subdued

despite the anticipated solid GDP rate,

and will unlikely approach the CNB’s

inflation target before 2017, thus

enabling the central bank to continue its

exchange rate policy. At the moment,

we cannot expect any fundamental

economic changes or reforms, except for

the abolition of the pension reform and

the introduction of the electronic

registration of sales. Progress in the

country’s preparations for joining the

euro area is not expected in this

electoral term either.

Growing net real wages and the

postponed consumption since the crises

(we calculate around 5% of GDP under

consumption) boost the retail sales and it

may be the main driver of this year’s

economic growth of around 2% Y/Y.

Prospects of the Polish economy

remain good in our view. For the

whole year 2016 we expect GDP

growth may reach 3.5 - 4.0 percent.

Apart from low interest rates (further

cuts cannot be excluded) and a

relatively weak zloty, we expect the

economy to draw additional support

from policy measures of the new

government (stimuli for private

consumption). The risks thus stem

mainly from a possible deterioration

in the external environment, most

notably in China, Russia and other

emerging markets.

Ou

tlo

ok

for

off

icia

l & m

arke

t ra

tes

The latest forecast does not envisage

the return of inflation to the target

before early 2017, with inflation not

significantly diverging from it afterwards

either. The CNB has extended its

exchange rate commitment until the

first half of 2017. The possibility of

introducing negative interest rates has

been increasing, in light of the widening

of the interest rate differential vis-à-vis

the euro area and developments in

domestic financial markets. But we still

don't expect negative CNB's rates. There

are two main preconditions for negative

official rates: 1) significant ECB's rate

cut, 2) continuing large monthly fx

interventions of the CNB.

A relatively strong and continuously

robust consumption is expected to push

inflation gradually higher. So this figure

suggests that NBH won’t cut the base

interest rate (0.9%) further in June despite

of the surprise drop in inflation back to

negative territory.

We expect the NBP to keep official

rates stable, but we think that risks

for of further rate cuts have

increased. The main reason is the

combination of the “inflow of cheap

euros from the ECB”, ongoing

deflation and stronger currency

(PLN). Hence, should the zloty get

strong there could be a window of

opportunity for the NBP to ease its

policy in the second quarter of this

year. Nevertheless this is not our

main scenario yet.

Fore

x O

utl

oo

k

Relatively strong economic growth,

current and capital account surpluses

and ongoing QE in the euro zone have

been the key factors behind the recent

strength of the koruna. With regard to

the inflation outlook and ECB’s policy,

we anticipate an exit from the fx regime

in the first quarter of 2017. The above

mentioned factors should however keep

the koruna close to EURCZK 27.0 in the

months ahead. Current turmoil on the

Chinese market poses negative risks for

the Central Europe. We however think

the impact on the koruna should only be

limited.

Outlook currently under the review. We think that zloty’s sell-off related

to markets’ fears coming from

appointment of new members of the

Monetary Policy Council (MPC) is

over now. Nevertheless, while

domestic fundamentals should be

relatively supportive for the zloty,

the currency should be mostly driven

by sentiment in emerging markets

and the ECB or the Fed policy actions

respectively.

Medium-term Views & Issues

Monday, 25 July 2016

P. 7

Source: CNB, NBP, NBH, KBC

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2015Q

1

2015Q

3

2016Q

1

2016Q

3

2017Q

1

2017Q

3

CZ: GDP outlook (Y/Y, %)

diff

ČNB

our est.

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2015Q

1

2015Q

3

2016Q

1

2016Q

3

2017Q

1

2017Q

3

CZ: Inflation outlook (Y/Y, %)

diff

ČNB

our est.

target

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2015Q

1

2015Q

3

2016Q

1

2016Q

3

2017Q

1

2017Q

3

PL: GDP outlook (Y/Y, %)

diff

NBP

our est.

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2015Q

1

2015Q

3

2016Q

1

2016Q

3

2017Q

1

2017Q

3

PL: Inflation outllok (Y/Y, %)

diff

NBP

our est.

target

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2015Q

1

2015Q

3

2016Q

1

2016Q

3

2017Q

1

2017Q

3

HU: GDP outlook (Y/Y, %)

diff

NBH

our est.

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2015Q

1

2015Q

3

2016Q

1

2016Q

3

2017Q

1

2017Q

3

HU: Inflation outlook (Y/Y, %)

diff

NBH

our est.

target

CBs’ Projections vs. Our Forecasts

Monday, 25 July 2016

P. 8

Official interest rates (end of the period)

Current 2016Q2 2016Q3 2017Q1 2017Q2 2017Q3

Czech Rep. 2W repo rate 0.05 0.05 0.05 0.05 0.05 0.05 -20 bps 9/27/2012

Hungary 2W deposit r. 0.90 0.90 2.75 0.90 0.90 0.90 -10 bps 5/24/2016

Poland 2W inter. rate 1.50 1.50 1.50 1.50 1.50 1.50 -50 bps 3/5/2015

Short-term interest rates 3M *IBOR (end of the period)

Current 2016Q2 2016Q3 2017Q1 2017Q2 2017Q3

Czech Rep. PRIBOR 0.00 0.25 0.29 0.28 0.28 0.28

Hungary BUBOR 0.94 1.01 2.90 0.90 0.90 0.90

Poland WIBOR 1.71 1.71 1.65 1.70 1.70 1.70

Long-term interest rates 10Y IRS (end of the period)

Current 2016Q2 2016Q3 2017Q1 2017Q2 2017Q3

Czech Rep. CZ10Y 0.56 0.50 0.62 0.80 0.90 1.00

Hungary HU10Y 1.98 2.18 4.20 2.80 2.80 2.90

Poland PL10Y 2.27 2.22 2.40 2.50 2.70 2.80

Exchange rates (end of the period)

Current 2016Q2 2016Q3 2017Q1 2017Q2 2017Q3

Czech Rep. EUR/CZK 27.05 27.06 27.15 27.05 26.70 26.20

Hungary EUR/HUF 313 315 305 315 310 313

Poland EUR/PLN 4.36 4.37 4.27 4.25 4.24 4.23

GDP (y/y)

2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4

Czech Rep. 2.3 2.0 2.2 2.3 2.3 2.2 2.3

Hungary 2.4 2.8 3.0 3.6 3.2 2.8 3.3

Poland 3.3 3.4 3.6 3.7 3.8 3.8 3.8

Inflation (CPI y/y, end of the period)

2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4

Czech Rep. 0.1 0.3 1.0 1.4 1.5 1.6 1.8

Hungary -0.2 2.4 2.4 2.5 2.1 2.2 2.4

Poland -0.8 -0.4 0.0 0.4 0.8 1.2 1.5

2016 2017 2016 2017

Czech Rep. 1.2 1.1 Czech Rep. -0.7 -1.1

Hungary 4.1 3.5 Hungary -2.0 -2.5

Poland -1.5 -1.3 Poland -2.9 -3.0 Source: KBC, Bloomberg

Last change

Public finance balance as % of GDPCurrent Account

Summary of Our Forecasts

Monday, 25 July 2016

P. 9

Brussels Research (KBC) Global Sales Force

Piet Lammens +32 2 417 59 41 Brussels Peter Wuyts +32 2 417 32 35 Corporate Desk +32 2 417 45 82 Joke Mertens +32 2 417 30 59 Institutional Desk +32 2 417 46 25 Mathias van der Jeugt +32 2 417 51 94 France +32 2 417 32 65 Dublin Research London +44 207 256 4848 Austin Hughes +353 1 664 6889 Singapore +65 533 34 10 Shawn Britton +353 1 664 6892 Prague Research (CSOB) Jan Cermak +420 2 6135 3578 Prague +420 2 6135 3535 Jan Bures +420 2 6135 3574 Petr Baca +420 2 6135 3570 Bratislava Research (CSOB) Marek Gabris +421 2 5966 8809 Bratislava +421 2 5966 8820 Budapest Research David Nemeth +36 1 328 9989 Budapest +36 1 328 99 85

ALL OUR REPORTS ARE AVAILABLE ON WWW.KBCCORPORATES.COM/RESEARCH

This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

Contacts