Headlines

Polish inflation weighs on zloty…

…but makes bonds more attractive

Polish zloty has been hit by further decline in inflation. In February, consumer inflation in Poland fell to its 6-years low at 1.3%. At these levels, it is already below the lower border of the Central bank´s tolerance band. Furthermore, we believe that inflation can decline further in the upcoming moths, bottoming out at 1% around mid-2013.

Predictions like this do not provide support for the zloty. Although we do not expect immediate interest rate cuts as a NBP response to the price growth slowdown, bets on rate hikes in foreseeable future are falling sharply. Current expectations of one interest rate cut in one year horizon (in FRA market) may continue to be priced in the market for some time as inflation continues to decline in the upcoming months.

Falling inflation should play in favour of the Polish bonds. The current 10 year yield at 3.90% is already very low by historical standards. On the other hand, combined with extremely low inflation, Polish bonds still bear a very nice real yield. Having compared it with negative real yields offered at most major developed markets, investors will find Polish bonds still attractive.

In the Czech Republic, industrial output declined by 4.1% y/y in January as expected. While hard data continue to confirm a weak start this year, soft data including our Flash leading indicator and PMI promise improved economic performance in the second to third quarter of 2013.

Currencies% chng
EUR/CZK25.52-0.4
EUR/HUF303.0-0.5
EUR/PLN4.150.3
EUR/USD1.300.3
EUR/CHF1.23-0.2

FRA 3x6%bps chng
CZK0.49-1
HUF4.512
PLN3.31-3
EUR0.230

GB%bps chng
Czech Rep. 10Y1.94-1
Hungary 10Y6.62-2
Poland 10Y3.89-4
Slovakia 8Y2.56-1

CDS 5Y%bps chng
Czech Rep.600
Hungary3340
Poland890
Slovakia910