CEE: Inflationary Pressures Remain Firm, Levitating LT Bond Yields

• In the past few months, we have seen that inflationary pressures have remained elevated in the CEE region, with CPI inflation currently standing significantly above the central banks' upper tolerance band.
• As a result, volatility in the long end of the curve has been rising sharply in recent weeks, especially in Poland and Hungary.
• In Hungary, the entire term structure has shifted to the upside with the 20Y yield currently trading at 4% (vs. 3.1% 1 month ago). We have seen that the NBH decided to slow down the pace of its policy tightening cycle, raising its policy rate by 15bps and expected to continue to do so for each of the last three meetings.
• In Poland, the quiet NBP has led to a sharp steepening of the term structure as policymakers have been keeping interest rates low despite the rising inflationary pressures. We saw that CPI inflation came in higher than expected in September up 5.8% YoY (vs. 5.5% exp.).
• Interestingly, volatility in the long end of the Czech term structure has been lower (relative to its CEE peers), and while the front end keeps rising sharply with CNB hiking aggressively (+75bps last week), the long end is nearly unchanged, which has led to a sharp flattening of the yield curve.

Source; Bloomberg/MNI