CEE Macro Weekly: October inflation treat - CPI falls again

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TOP MACRO THEME(S):

• What drives (or hinders) industrial production? (p. 3) – Amid regional differences in the headline figures, the details reveal even greater divergence in industrial trends.

WHAT ELSE CAUGHT OUR EYE:

• POL: In October CPI inflation once again surprised to the downside, falling to 2.8% y/y from 2.9% y/y in September. This result was not only below both market consensus and our expectations, but also lower than the projection presented by the NBP Governor at the October press conference, which had assumed an increase in inflation to 3.0% y/y. The decline in inflation was driven by slower growth in food prices, partially offset by higher fuel prices. We estimate that core inflation (excluding food and energy) eased to around 3.0% y/y from 3.2% y/y a month earlier - the lowest level since November 2019, and only slightly above the NBP’s inflation target. Prices in core categories remained broadly stable compared to September, while their annualized momentum weakened notably. We forecast CPI inflation to continue declining in the coming months, with the NBP’s 2.5% target expected to be achieved on a permanent basis in 2026. In our view, the October inflation data increase the likelihood of a rate cut at the November MPC meeting. Despite the Council’s rather volatile rhetoric, it has recently shown sensitivity to current inflation readings. The October print is encouraging, not only because headline CPI came in below the NBP’s forecast, but also due to its favourable composition. The disinflation process is progressing within core categories - those most responsive to monetary policy - while the effects of various exogenous factors are largely offsetting each other.
• POL: According to data form the Credit Information Bureau (BIK), mortgage sales in September totalled PLN 10.7bn which is a record high level. In y/y terms sales rose by 63%, as a series of downward NBP rate “adjustments” and improving consumer sentiment have driven a rebound in the housing market.
• CZE: Babiš, the leader of the ANO movement, announced that he has agreed the terms of a coalition agreement with the Freedom and Direct Democracy (SPD) and The Motorists for Themselves party, to be signed on 3 November. According to A.Babiš, the new government should be formed by mid-December.

THE WEEK AHEAD:

• The key event of the week in the CEE region will be Wednesday’s meeting of Poland’s MPC. We expect another 25bp rate cut, supported by a likely decline in inflation toward the target in the new NBP projection; however, an alternative scenario of rate stabilization also appears plausible.
• CNB is widely expected to keep interest rate at 3.50% on Thursday
• On Wednesday, the flash October CPI inflation will be released in Czechia. On Monday, we will get October manufacturing PMI readings for Poland, Hungary, and Czechia, while on Thursday, September industrial production data from Czechia and Hungary.