CEE Macro Weekly: Monetary calm and fiscal buzz

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TOP MACRO THEME(S):

• Chinese pressure on CEE imports (p.3) – Imports from China are accelerating across most of the CEE region, although the underlying drivers differ considerably across countries. In July, China became Poland’s largest source of imports, overtaking Germany for the first time ever.

WHAT ELSE CAUGHT OUR EYE:

• CZE: The CNB kept its key interest rate unchanged at 3.75%, in line with expectations. In its statement, the Bank noted that inflation remains close to the 2% target, but elevated core inflation, strong wage and credit growth, and the growing risk of higher commodity prices argue for maintaining a restrictive monetary policy stance. The CNB assessed the balance of risks as inflationary and indicated that at the next meeting the bank will decide between leaving rates unchanged and raising them. We expect flat rates until the end of this year, with room for one rate cut emerging in 2027.
• POL: The Fiscal Council reviewed the draft 2027 budget. It concluded that the budget “shows a persistent and deep imbalance in public finances” and “does not set out measures that would ensure the start of fiscal consolidation, while the government is failing to use favourable economic conditions to reduce the deficit”. The Council also noted that the current imbalance reflects expenditure growth outpacing revenue growth, stressing that defence spending accounts for only around one-quarter of the increase in total expenditure since 2021. The risk that state public debt (PDP) will exceed the prudential threshold of 55% of GDP in 2027 was assessed as very high.
• CZE: The ruling coalition agreed on the 2027 fiscal targets, with the deficit set to be reduced by no more than CZK 10bn from the proposed CZK 389bn (3.5% of GDP). The coalition also committed to further consolidation of around CZK 60bn in 2028. The 2027 budget should be finalised before Christmas.
• ROM: President N.Dan nominated Siegfried Muresan (PNL) as Prime Minister in an attempt to break the prolonged political deadlock. S.Muresan accepted the nomination, but no clear parliamentary majority has yet emerged to support his government.

THE WEEK AHEAD:

• Later today Moody’s will review Poland’s sovereign rating. Given the lack of a clear fiscal consolidation plan and the fact that Moody’s rating is one notch above those of Fitch and S&P, a downgrade cannot be ruled out (currently A2 with negative outlook).
• We expect the MNB to leave interest rates unchanged on Tuesday. Following rate cuts in previous months and amid rising geopolitical risks, a wait-and-see approach appears warranted.
• In Poland, labour market data are likely to confirm slowing wage growth and a further decline in employment in the enterprise sector. Retail sales growth should confirm the strength of consumer demand, while construction output is expected to point to solid investment activity.