NBP to finally cut but nothing aggressive

The most important event in the EMEA region next week is the rate decision in Poland. We have been saying for a long time that the Polish central bank (NBP) needs to ease monetary policy further in order to stem deflationary pressure. Finally, everything points to the NBP delivering the long-awaited rate cut. Consensus, including us, expects the NBP to deliver a 25bp rate cut. This will bring the key policy rate to 2.25%.

There are speculations in the market that the NBP could deliver a more aggressive 50bp rate cut next week. We indeed agree that a more aggressive rate cut is needed but given how reluctant the NBP was to acknowledge the need for further easing, we do not believe that a 50bp rate cut will get the majority vote within the Monetary Policy Council (RPP) next week. That said, it is very likely that the 50bp rate cut will be discussed and some RPP members will vote for it. Furthermore, the statement from the central bank is likely to point to further easing.

Looking ahead, we believe that the cutting cycle will continue in November with another 25bp cut.

New RUB forecast – no reason to be optimistic for now

In light of our update on our EUR/USD forecast, we have updated our forecasts on the Russian rouble. The updated forecasts do not overall reflect any major change of our views on the Russian economies or markets but rather reflects our new more bullish call on the dollar.

With the dollar continuing to strengthen with the prospect of a tighter-than-earlier expected US monetary stance and lower oil prices, it is hard to be optimistic on the rouble even disregarding geopolitical concerns.

Hence, we continue to worry about the Ukrainian crisis where the news flow overall recently has been mixed and about the slowdown in the Russian economy and more interventionist policy measures implemented in Russia recently. More importantly, as noted above, we worry about the global financial environment. A stronger dollar and a lower oil price are not good news for the rouble.

Therefore, we continue to expect the rouble to weaken against the basket (55% USD and 45% EUR) on three, six and 12-month horizons and as a result we advise clients to be positioned for even more rouble weakness. See our updated RUB forecasts on page 4.