CEE Macro Weekly: Looking for signs of turning point in economic sentiment

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TOP MACRO THEME(S):

• Dog days are over (p. 3) – Consumer confidence has significantly improved across CEE region since late 2022, driven by significant reduction of inflation and better economic outlook – although households’ finances have seen only modest improvement.

WHAT ELSE CAUGHT OUR EYE:

• POL: CPI inflation in July declined to 3.1% y/y from 4.1% y/y in June, exceeding both our expectations and the consensus (cons.: 2.8% y/y; PKOe: 2.9% y/y). The main source of the surprise was a sharper-than-expected increase in fuel prices. The decline in inflation was primarily driven by a significant drop in the annual growth rate of energy prices, which fell to 2.4% y/y from 12.8% y/y in the previous month, largely due to a decline in natural gas prices and the base effect related to the partial unfreezing of energy prices in July 2024. We estimate that core inflation may have decreased to 3.3% y/y from 3.4% y/y in June. From the MPC’s perspective, the sustained return of inflation to within the tolerance band around the target is an important development. However, in our assessment, this may not necessarily prompt a rate cut at the September meeting. Our baseline scenario envisages the first reduction in November, when policymakers will have the benefit of updated NBP projections for GDP and inflation, alongside more comprehensive information on the 2026 state budget.
• POL: PMI for manufacturing rose to 45.9pts in July, close to our forecast, indicating a slight improvement compared to June. Conditions remained challenging in terms of output and new orders. The production index declined for the third consecutive month, although the pace of decline slightly eased compared to June. New orders continued to fall, marking the fourth consecutive month of reduction. A positive signal is the sudden rebound in business expectations regarding future output – the share of firms anticipating growth increased from 24% in June to 30% in July.
• POL: Prime Minister D.Tusk stated in an interview that the government is unlikely to raise the standard tax allowance to PLN 60,000 from PLN 30,000 in 2027, following recent remarks by Finance Minister A.Domański that such an increase would be unfeasible in 2026.
• CZE: CNB Deputy Governor, Eva Zamrazilova, stated that the monetary easing cycle is almost certainly complete. She cited the real estate market as a key reason for maintaining policy rates, noting that listing prices for both new and existing homes have risen by 17% y/y. While she does not see a case for interest rate hikes, she highlighted accelerating services inflation, driven by robust wage growth and resilient household consumption. J.Seidler (Board Member) stated that interest rates in Czechia are close to their neutral level, making a ‘hold’ stance the natural choice. He added that the room for further cuts is very limited and, barring unforeseen developments, the easing cycle is likely over.

THE WEEK AHEAD:

• Monetary policy will be in the spotlight. CNB will decide on interest rates on Thursday, followed by NBR’s Friday decision. In both cases we expect interest rates to remain flat – inflation pressure in Czechia has increased somewhat recently, while Romania is far from the target, with many upside risks to inflation outlook and overall macro stability under a question mark. CPI inflation (July readings) will be published in Czechia and Hungary.