Decision time – for Belka as well

The EMEA markets will be focused on central banks in the coming week, with the Hungarian, Czech and Turkish central banks announcing rate decisions. We expect the Hungarian and Turkish central banks to cut – Turkey by 50bp and Hungary by 10bp – but expect the Czech central bank to stay on hold and maintain both the key policy rate at a technical zero of 0.05% and its exchange rate commitment.

Earlier in the year, the Turkish central bank (TCMB) hiked interest rates aggressively to curb the freefall in the Turkish lira. However, since then the lira has stabilised and the TCMB has started to ‘normalise’ rates. We expect the TCMB to continue this next week. We believe it is justified given continued relatively weak growth in the Turkish economy and the stronger lira, but it is also notable that inflation remains well above the TCMB’s official 5% inflation target and it is likely to be concerned that too aggressive a rate cut could put pressure on the lira. So, even though the Turkish government has put considerable pressure on the TCMB, we only expect a 50bp cut – in line with consensus.

In Hungary, we expect the Hungarian central bank (MNB) to continue its policy of baby-step rate cuts and cut by another 10bp points to 2.30%. This seems fully justified now that we have outright deflation in Hungary, which is well below the MNB’s official 3% inflation target. Also, consensus expects another 10bp rate cut.

That said, there are certainly also reasons why the MNB might begin to complete ending the rate cutting cycle. First of all, the deflation in the Hungarian economy to a large extent reflect supply factors rather than weak demand. Second, growth has been picking up in the Hungarian economy and we are likely to be getting close to or maybe above potential growth in the Hungarian economy. Finally, as rates are coming down, carry on the Hungarian forint has been coming down, which makes a sell-off in the forint more likely.

The Czech central bank (CNB) is unlikely to surprise with anything new. It will maintain its commitment to the exchange rate cap. It could perhaps say that the economy is on its recovery track but at the same time, it could say that the risks are somewhat antiinflationary, as inflation has repeatedly been below the CNB’s forecast. Overall, the rhetoric should be fairly balanced and therefore CZK neutral.

‘Belkagate’ – when central bankers get involved in politics

The scandal in Poland involving the Polish central bank governor Marek Belka hit the Polish markets this week. The scandal broke after the Polish magazine Wprost published an article about a leaked conversation between interior minister Sienkiewicz and central bank governor Belka. On the leaked tapes, Belka appears to be calling for the sacking of then finance minister Rostowski. The recording is from 2013 and Rostowski was later forced to resign. This story presents a problem for both the Polish government and for Belka and a number of opposition politicians are already calling for the sacking of both the interior minister Sienkiewicz and Belka. From our perspective, there is no doubt that this could develop further in the coming days and even though we do not necessarily think it will have a long lasting impact on the Polish markets, it is likely that zloty volatility will remain heightened in the near term. Furthermore, if this eventually leads to Marek Belka being forced out as central bank governor, then, of course, the scandal could have longer lasting implications.