Central and Eastern European monetary policy is increasingly split, with Hungary moving towards easing while Poland’s NBP and the Czech Republic’s CNB stay on hold with a hawkish bias. In Poland, policymakers maintain that rates are restrictive enough to stabilise inflation and see limited broadening of price pressures, while also flagging growth headwinds linked to oil prices. In the Czech Republic, inflation eased to 2.1% in May from 2.5% in April, yet the stance remains tilted towards tightening.
Markets have mirrored the divergence. Since late February, the 10-year HUFGB yield has fallen by 93bp, whereas Czech and Polish yields rose by 48bp and 76bp respectively. Foreign exchange has moved differently: the forint has strengthened 6.5% versus the euro, while the koruna and zloty have weakened, pointing to differentiation in perceived macro conditions across the region.
Policy Divergence and Trading Themes
We are seeing a clear split in Central European policy that creates trading opportunities. The central banks in Poland and the Czech Republic are staying tough on inflation, while Hungary is starting to cut interest rates. This divergence is the main theme we should be trading in the coming weeks.
Trade Ideas Based on Macro Resilience and Rate Differentials
Given Hungary’s perceived macro resilience, we favor trades that benefit from a stronger forint and lower Hungarian yields. The Magyar Nemzeti Bank’s recent 25 basis point cut in late May was supported by the latest inflation data, which showed a fall to 3.4% year-over-year. We should consider using options to position for EUR/HUF to move lower, or use interest rate swaps to bet on Hungarian yields falling further.
Conversely, we anticipate continued weakness for the Polish zloty and Czech koruna against the euro. The National Bank of Poland has signaled no cuts are likely before the fourth quarter, especially with inflation remaining sticky at 5.1% in May. We can express this view by buying EUR/PLN and EUR/CZK calls, positioning for those currencies to weaken.
The most direct way to play this is through relative value trades. We are looking at going long the Hungarian forint against the Polish zloty, expecting the HUF/PLN cross rate to appreciate. In the bond market, we see value in a spread trade that bets on the yield gap between 10-year Hungarian and Polish government bonds widening even more from the current levels.
