Tail-wind for bonds from lower interest rate environment and multi-year consolidation plans

Although inflation is to edge higher due do a diminishing base effect, which contributed to the very fast collapse of inflation in previous quarters, inflation is expected to be contained at the level which allows modest rate cuts and at the same time keeps real interest rates positive. The lower interest rate environment together with fiscal consolidation prescribed by the renewed EU fiscal framework should be supportive of CEE bonds. All in all, after some market correction from beginning of year, we expect long end of LCY yields to drop with lower key rates. Finally, Croatia, in expectation of rating upgrades, is seen at narrower spreads compared to Slovakia.