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2022/04/19 / Erste Group Research

CEE Bond Report | Inflation going through the roof

Inflation should average at 9.8% in CEE this year, with visible risks to the upside. CEE central banks will continue in monetary tightening, while the CNB is likely heading closer to the end of the hiking cycle. Yield curves should become more inverted.

The CEE bond market received a strong hit from Russia’s invasion of Ukraine. 10Y yields have approached levels last seen about a decade ago. However, the increase of yields has been more associated with reduced liquidity, higher interest rate expectations stemming from climbing inflation and further growth of energy and food prices, rather than concerns about sovereign risk. The increase of Credit Default Swaps was rather meager, especially when compared to the bond market crisis in 2011/2012.

Weaker economic growth, in combination with high inflation, will call for higher fiscal action this year to avoid the risk of stagflation. Many governments have already launched their 'anti-inflation' initiatives, which will certainly come at high costs or borrowing needs. In the short run, CEE countries will also face higher spending related to the hosting of refugees from Ukraine, but those are likely to be reimbursed from the EU funds. CEE countries plan to speed up drawing money from the NGEU, with projects focused on diversification of energy sources and reduction of energy consumption getting the highest priority.

Inflation in the region keeps surprising to the upside, driven by the recent surge in energy and food prices. Moreover, inflation peaks are still ahead and inflation should remain in single digits throughout the year only in Croatia and Serbia. Inflation should average at 9.8% in CEE, with visible risks to the upside. Next year, CEE inflation should moderate somewhat, but remain above the target (6.3% on average) in all CEE countries.

The war in Ukraine has put central banks in a difficult situation, as the current crisis constitutes a negative supply and demand shock at the same time. While the Czech National Bank is likely getting closer to the end of the hiking cycle, with one hike expected for May and then the possibility of a cut in November, other CEE central banks will continue tightening monetary conditions in the next few quarters.
With central banks in Czechia, Hungary and Poland very committed to fighting inflation, we should see yield curves becoming even more inverted in the next couple of quarters. With inflation likely reaching a peak in the next couple of months and hopefully some stabilization or even decline of commodity prices, yields in Czechia, Hungary and Poland should drift a little bit lower. In Romania, the government is likely to face higher yields on the domestic market, as the central bank will need to keep RON liquidity tight to prevent the RON from stronger depreciation. We see some relative value in Croatia’s Eurobonds compared to Hungary’s Eurobonds, stemming from those countries' divergence in the deepening of integration within the EU and access to EU funds.

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General information

AuthorErste Group Research
Product nameCEE Bond Market Report
Topic in focusFX, Macro/ Fixed income
Economy in focusCEE, Croatia, Czech Republic, Hungary, Poland, Romania, Serbia, Slovakia, Slovenia
Currency in focusCroatian Kuna, Czech Koruna, Euro, Hungarian Forint, Polish Zloty, Romanian Leu, Serbian dinar
Sector in focus-


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