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Macro week ahead

The central banks of Turkey, the Czech Republic and Hungary are to decide on interest rates. In Hungary, the BoP for 1Q14 will be out and in Russia the weekly CPI report for the third week in June.

This week is unlikely to be groundbreaking in terms of economic newsflow.

The Turkey central bank is set to continue the rate-cut cycle started in May with a measured and gradual decrease in rates, especially given that in mid-June the governor hinted that another small cut in interest rates was likely at the end of the month. However, we do not expect a greater cut, given elevated inflation and high exchange rates.

Beyond this month, bond yields are well below the running inflation (9.7%) and the CBT funding rate (9.5%) and factor in a rate cut of at least 150bp from the central bank in our view. In order to reach 7% market interest levels, one must assume a much bigger cut from the bank of 250-300bp, which does not look realistic to us in the context of inflationary pressures, current account deficit dynamics, the Fed’s tightening cycle possibly starting in 2015 as well as political risks (see Turkish Banks - A bridge too far, of 20 June).

In Hungary, we are in line with the Bloomberg consensus, expecting the NBH to deliver another 10bp cut in the benchmark interest rate (to 2.3%) at the forthcoming meeting, particularly given comfort in the close-to-deflation environment, muted medium-term inflation risks and more dovish ECB policies. Excluding the rate decision, the MPC is also to decide on the policy direction for the rest of 2014.

The Czech Republic is committed to maintaining a weak crown into 2015 (above 27 against the euro) to boost the economy amid an ultra-low interest rate backdrop and the CNB is ready to use verbal interventions if needed.

In Russia, we believe that the weekly inflation print will reveal a further slowdown in inflationary pressure, particularly, on the vanishing second round effect from a shock on the pork market. For June we expect 7.7% YoY.

Vladimir Kolychev, Daria Isakova, Akin Tuzun
VTB Capital analyst

CPI, Russia

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