Ukrainian crisis spooks NBP

The crisis in Ukraine has made NBP reconsider monetary tightening

After more than a month of the Ukrainian crisis completely dominating the agenda for Central and Eastern European markets, the apparent de-escalation of the crisis (see below) could mean that market participants might now start to focus on other issues – for example, whether there is likely to be a change in rhetoric from the Polish central bank (NBP) when the bank’s Monetary Policy Council meets next week.

We have long argued that the NBP has been too hawkish given the relative growth in the Polish economy and the fact that inflation has for some time remained well below the NBP’s own official inflation target of 2.5%. However, so far, the NBP has maintained that no further monetary easing is needed – despite the fact that it has kept forecasting that inflation would stay below the 2.5% inflation target in the coming years.

However, things might now be changing. The paradoxical reason is that Polish policymakers have been spooked by the Ukrainian crisis and it seems they might think that the Ukrainian crisis could have a sizeable negative impact on the Polish economy. While it is obvious that a military escalation in Ukraine in the form of a Russian invasion of Ukraine would have significant ramifications for the Polish economy, it is on the other hand doubtful whether the Ukrainian crisis so far has had any meaningful negative impact on the Polish economy.

Some NBP officials have already expressed concern about the possible negative impact of the Ukrainian crisis on the Polish economy and we expect the Monetary Policy Council to soften the rhetoric further next week by giving a fairly clear signal that interest rates will be kept on hold at least through this year and maybe also in 2015. Previously, the NBP had been signalling that it was moving closer to rate hikes. While we do not think there is any real reason to be overly concerned about the impact of the Ukrainian crisis on the Polish economy for now, we would nonetheless welcome a less hawkish monetary policy stance from the NBP given still fairly weak growth in the Polish economy.

Concluding, we expect the NBP to keep its key policy rate unchanged at 2.5% next week but also further soften its communication with the markets.

A minor de-escalation of the Ukrainian crisis

After weeks of escalation of geopolitical tensions, the worries over the Ukrainian crisis seem to have eased somewhat over the past week. Last week saw reports of a build-up of Russian troops on the Russian-Ukrainian border, but over the weekend Russia’s president Putin called US president Obama to discuss a political settlement of the crisis. And within the past couple of days there have been reports that some Russian troops have pulled back from the border areas. While it is uncertain whether there actually has been a military escalation or not, the verdict from the market has been pretty clear: tensions are easing. As a consequence, the rouble and the Russian stock market have recovered nicely this week.

That of course does not mean that everything is just fine. First, the shock we have already seen will be visible in the Russian and Ukrainian macroeconomic data in the coming quarters and we continue to think that Russia is likely to enter into recession this year – even if we continue to see a further de-escalation of the conflict. Second, the damage done to the Russian economy is probably of a more permanent character and the conflict is likely to have a negative impact on foreign direct investments into Russia for years to come. So, while a de-escalation of the conflict is positive for Russian markets, we are unlikely to see a long-lasting strong recovery in the rouble and in this regard it should be remembered that Russian growth is likely to remain subdued for some time to come.