Hungarian central bank to continue easing
We expect the Hungarian central bank’s (MNB) Monetary Policy Council (MPC) meeting next week to decide to continue its monetary easing. It is broadly expected that the central bank will ease monetary policy further and, for the seventh consecutive month, cut by 25bp, to 5.25%. We also expect a 25bp cut.
Looking ahead, given the MPC is dominated by doves, further easing is expected. This said, the case for further rate cuts has been strengthened by recent economic data. Following the very bad Q4 12 GDP number, the outlook for the Hungarian economy looks even gloomier than previously. The preliminary release of Q4 12 GDP revealed a deep contraction, with GDP falling by 2.7% y/y in Q4, down from a fall of 1.5% y/y in Q3 12. It looks likely to us that the Hungarian economy will remain in recession this year. This is the main argument for the MPC to ease monetary conditions further. Additionally, a new governor will soon be appointed and he is likely to be more dovish than the outgoing governor Andras Simor. Therefore, all indications are that there will be additional rate cuts despite inflation still being somewhat above the official inflation target of 3%.
Looking ahead, given the MPC is dominated by doves, further easing is expected. This said, the case for further rate cuts has been strengthened by recent economic data. Following the very bad Q4 12 GDP number, the outlook for the Hungarian economy looks even gloomier than previously. The preliminary release of Q4 12 GDP revealed a deep contraction, with GDP falling by 2.7% y/y in Q4, down from a fall of 1.5% y/y in Q3 12. It looks likely to us that the Hungarian economy will remain in recession this year. This is the main argument for the MPC to ease monetary conditions further. Additionally, a new governor will soon be appointed and he is likely to be more dovish than the outgoing governor Andras Simor. Therefore, all indications are that there will be additional rate cuts despite inflation still being somewhat above the official inflation target of 3%.
Polish economy continues to struggle
Next week’s data is not likely to bring much to cheer about in terms of the Polish economy. The Polish economy was a star performer in 2008-09; when major crisis hit the rest of the world the Polish economy kept growing. However, over the last year, the Polish economy has slowed down significantly. There has undoubtedly been some spillover from the euro crisis but it is notable that it is a relative sharp slowdown in domestic demand in particular that has caused the GDP slowdown over the last 1.0-1.5 years.
Next week we are due to get Polish retail sales data, which we believe is likely to confirm that the Polish consumer continues to hurt. We expect retail sales to have fallen 3.4% y/y in January – up from a fall of 2.5% y/y in December – accompanied by weak income growth, tight monetary and financial conditions and general worries about Polish growth prospects.
The weakening of Polish domestic demand is also likely to have weighed on Polish GDP growth in Q4 12. We expect GDP growth to have slowed to 1.0% y/y in Q4 12, down from 1.4% y/y in Q3 13.
Looking ahead, we expect growth to remain lacklustre in coming quarters but expect a moderate recovery starting later in the year, as we believe European and global growth is likely to pickup and expect the Polish central bank (at least we hope it will) steps up monetary easing.
The rouble: between the upper and lower millstone
For the past seven days the rouble basket (EUR45%+USD55%) has been trying to break the ‘informal’ lower border of the trading band set by Russia’s central bank (Bank Rossii) at 34.65 as Brent climbed near its 12-month maximum posting USD118/bl on 14 February 2013 and other fundamentals look supportive for the RUB. However, Bank Rossii’s tiny intervention tried to weaken the RUB before returning risk-off sentiment has done the job following a reaction to the Fed minutes and news on Chinese property curbs. Also, large inflows from the Russian budget have been artificially suppressing the RUB since the beginning of this year.
Whether or not the risk-off eases soon, we expect a short strengthening of the RUB as exporters are selling their FX income before the main tax payments: (1) 25 February – excises and mineral extraction tax and (2) 28 February – corporate income tax, mineral extraction tax and some compulsory insurance payments.
