CEE Macro Weekly: Nobody wants to consolidate

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TOP MACRO THEME(S):

• Housing market recovery fuelled by rate cuts (p. 3) – Strong mortgage activity and easing interest rates supported Poland’s housing market.

WHAT ELSE CAUGHT OUR EYE:

• CZE: Parliamentary elections are taking place in Czechia. Available polls have so far pointed to a victory for the opposition ANO party of former Prime Minister A.Babiš, but not by enough for an outright majority. The most likely scenario appears to be a coalition with the nationalist SPD, although in a recent interview Babiš said he was counting on governing alone, adding that the SPD was not interested in joining the government - something that is not entirely consistent with the signals coming from that party. Several informal coalitions are taking part in the election, allowing them to bypass the higher electoral threshold; as a result, the next parliament will likely be highly fragmented, which in turn will make it harder for ANO to secure seats. Under these conditions, an ANO–SPD minority government supported by the Motorists seems the most probable. At the same time, the process of forming a government may be protracted. ANO’s return to power would set the country on a collision course with the EU - particularly on climate and migration policy. It is likely to result in looser fiscal policy, which will require rewriting the 2026 budget.
• POL: The Council of Ministers has adopted the draft Public Finance Sector Debt Management Strategy for 2026–2029. The forecasts, which run through 2029, assume a steady increase in the public debt-to-GDP ratio - from 55.3% of GDP in 2024 to 75.3% of GDP in 2029. General government (GG) debt in 2025 and 2026 is projected to be lower than presented in the 2026 budget act (by 0.6% of GDP and 1.4% of GDP, respectively). By contrast, state debt (as defined in Article 38a of the Public Finance Act), which is the basis for triggering prudential thresholds, is expected to exceed the 55% threshold in 2028, which would mean that the 2030 budget would have to factor in the launch of stringent prudential procedures. The plan to again increase the role of extra-budgetary funds - indicated by the assumed rise in the share of “off-budget” debt from 19% in 2q25 to 21% in 2029—is intended to delay breaching the constitutional thresholds. The projected GG sector deficit path assumes no material fiscal consolidation. In our view, the document signals that debt remains on an upward trajectory, which is unsustainable in the long run and will require the Ministry of Finance to present a credible fiscal consolidation plan. Finance Minister A.Domanski stated that the government is working on measures to reduce the debt path relative to that outlined in the Strategy.
• ROM: Ministry of Finance revised the 2025 budget, widening the deficit to 8.4% of GDP from the initially planned 7.0%. The gap (RON 159.2 bn) reflects higher spending (by RON 27.8 bn) with only modest revenue gains (RON 3.2 bn). The largest increases were in debt-service costs (RON 12.1 bn) and projects financed from the loan component of the RRF (RON 5.4 bn).

THE WEEK AHEAD:

• The key events this week will be the central bank decisions by the NBP and the NBR. We assume interest rates will be left unchanged in both cases; however, the outlook for Poland is subject to considerable uncertainty due to the positive inflation surprise in September and greater clarity regarding energy prices, which may prompt another 25pb cut.