Tensions in East Ukraine further escalate

Headlines

Tensions in East Ukraine further escalate

NBP contemplates asset market intervention

The Central European currencies eventually closed only little changed on Friday despite the fact that the forint and the zloty were trading about 0.4 % weaker against the euro in early afternoon vis-a-vis Thursday’s close. In the case of the forint, low headline inflation in March could have played a role; let us, however, recall that while the headline figure dropped to 0.1 % Y/Y, core inflation reached 2.7 % Y/Y. Still, the reading was below expectations and the central bank is therefore likely to cut rates to a new all time low of 2.5 % at its next meeting in two weeks.

During the weekend, the Polish central bank (NBP) president Marek Belka said at an IMF event that his bank was contemplating unconventional policy measures that would have to be used if the position of banks would worsen due to heightened market volatility. Recall that unlike in most other central banks in the developed world, the NBP’s reference rate at 2.5% stands well above zero and there’s therefore no pressing need to ease policy by using non-standard measures (as early news headlines from the IMF event could have incorrectly suggested).

As for the upcoming week, the CEE calendar is well filled owing to mainly Polish macroeconomic figures (inflation, industrial production, wages and others). Nevertheless, markets´ attention will probably focus on further escalation of the conflict between pro-Russian protesters and government forces in East Ukraine as an ultimatum given by Ukrainian authorities to rebels expired this morning and armed military action could follow. In such a case, the zloty and the forint would be particularly vulnerable.