Increases in inflation are visible

Investors started to price in certain political or fiscal loosening risk premia in several CE/SEE markets , like Romania, Serbia or Poland.

Due to base effects (incl. energy prices) and domestic developments inflation figures are in market spotlight in Western Europe and CEE markets. In Hungary or Czech Republic strong increases in inflation are already visible, while in other cases we will likely see more pronounced effects in January.

The reflation topic definitely has a market impact, from a short-term perspective most prominently in Czech Republic where market bets on a front-loaded FX cap release soared. For the time being we remain more cautious as we see the Czech National Bank remaining focused on domestic inflationary pressure, which is expected to peak in Q1 and may fade later in 2017. Therefore, we would assume that the CNB may wait for more clearness on the domestic inflation front (in H2 2017) before lifting the FX cap (the latter may have a disinflationary effect).

Meanwhile, investors started to price in certain political or fiscal loosening risk premia in several CE/SEE markets recently (e.g. Romania, Serbia or Poland). We expect this tendency to continue. This holds especially true in case negative rating pressure will materialise in Poland (with rating reviews looming for Poland today after market closing bell).

With regards to the political newsflow the appointment of a caretaker government in Bulgaria (with the newly elected President taking his position next week) could also attract market interests, while in recent days the market focus remained on a potential rapprochement between Russia and the US.

We have a more detailed look at this topic, incl. potential implications for Ukraine, in our Focus on section on page 2-3. On a positive note we have not seen material spillovers from the unfolding financial crisis in Turkey on CEE markets, which speaks for the resilience of the region.

Nevertheless, the developments in Turkey do highlight that increasing political influence on the central bank and erratic policy moves can strongly backfire in case supportive global market conditions are turning (in case of Turkey oil prices and capital flows).

Romania (RO) – Several fiscal easing measures were enforced by the new Parliament and Government recently or are due to be enforced, among the most important being: the tax exemption of pensions below RON 2000, the exemption of pensions from the payment of health contribution, the increase of wages from local administration by 20%, a 9% hike of pensions (pensions were already raised by 5% as of January). These fiscal measures would generate a first round effect of around 1.0% -1.1% of GDP on the public budget deficit for 2017, according to the computations made by President’s economic advisors or those made by the Fiscal Council.

More on: Raiffeisen CEE _13_01_2017

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