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Central European Daily

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Polish MPC should deliver a slight softer statement

Wed, Jul 30 2008, 07:27 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: CNB board members continue to try talking down the koruna
Fixed Income: Polish MPC should deliver a slight softer statement

Currencies

The Polish zloty ended the Tuesday session unchanged in the EUR/PLN 3.20-3.21 area after the pair fully recovered from a technical correction which saw the EUR/PLN test bids in the 3.23 area early in the session. With the MPC rate call due out today we should see the zloty consolidate at the start of the day as most players will stick to the sidelines at least until the policy statement and press conference in the afternoon. While we see a decent chance that the MPC will incorporate some softer wording regarding the most recent FX market developments into the statement, we doubt whether the comments will be firm enough to weaken the zloty significantly. In fact we are tempted to speculate that the (slightly softer) policy stance will remain on the hawkish side given the commitment the Council had voiced repeatedly to keeping inflation expectations under control. Meanwhile the market seems to be looking for an outright dovish statement. Whether this will be enough to keep the PLN from breaking past 3.20, remains to be seen.

The Hungarian forint was helped by the positive sentiment on international markets and the currency appreciated to a 1-week high of 230.00. Lower oil prices and higher equities were helping it to go stronger and the news about a possible Czech rate cut with the risk of CZK weakening was not able to counterbalance this. So far, so good, so let’s see whether we can test the record 228 level soon or not.

It seems that CNB bank Board’s members take its warning that the bank will cut its base rate seriously. Another two Board members (M. Singer and P. Řežábek) are now considering a rate cut option. Moreover, Řežábek even said he could imagine a discussion about cutting interest rates by more than a quarter-point - by half a point, for example. Hence, it seems to us that a rate cut is really on the table now, but the koruna will decide everything. We think now that if the exchange rate stays visibly below current levels (EUR/CZK 23.7), the CNB will fulfill its warning and will cut rates by 25 bps on August 7th. But the big question is how the koruna will behave till this meeting. In our view, strong dovish comments and a US dollar rebound could bring some downward pressure for the koruna.

The Slovak forex market was quiet and the EUR/SKK currency pair remained almost unchanged around the level of 30.375. The Slovak koruna was in the range of 1.276– 1.286 against the neighboring Czech currency. The Slovak Central Bank released its new quarterly prognosis. NBS revised the GDP growth for the year 2008 up by 2 ppt to 7.6 percent. But the projected GDP for 2009 was decreased to 6.6% from 6.9%. The bank also changed its inflation development expectations. HICP (year end) is now expected to be at 4.0% (prior 2.8%) this year and at 2.8% in 2009 (3.1% previously). It is interesting that NBS lowered the inflation forecast for the Euro adoption year. The experience from the Slovenia is negative which creates certain risk. Anyway, it is very likely that most of the entrepreneurs try to raise the prices ahead of January 2009 and therefore the “Euro changeover effect” could weigh on the inflation in 2008.

Fixed income

The Polish bonds traded lower in yields ahead of the MPC rate decision later today. Given the most recent bullish run (the curve has moved lower by 20 bps. over the last week) the market seems confident that the policy stance will be softened as early as today. While we believe some additional reference to the anti-inflationary impact of the strengthening zloty is likely in the statement, we also think this will be the only new dovish argument in the communiqué. Hence we would rather look for the statement to come in only slight softer in July than the hawkish wait-and-see rhetoric voiced by the Council in June. On balance the expected rise in inflation in July and August along with the strong labor market numbers combined with signs of slowing economic growth should help keep the stance on the hawkish side. The slightly softer wording on the zloty could nevertheless push the curve lower at first sight, although in a longer term perspective we doubt whether the July statement will be the turning point for the market ahead of the next major down-leg in yields.

Hungarian bonds did not come alive yesterday and prices remained hibernated, but the stronger currency should have some positive impact here sooner or later. Lower oil price will also help inflation and the recent drop could help inflation to drop to around 5.5% by the year-end, roughly 0.5pp below the consensus estimation for 6%.

Czech bonds strengthened on Tuesday. The trading volumes were surprisingly high supported by continuing CNB members’ declarations that the strong Czech currency slows economic development and that the bank should react. Hence, the yields lost up to 7.5 bps at the front end and the yield curve steepened. As the CNB meeting comes nearer, the market grows ever more nervous. This morning Mr. P.Rezabek, has added that he could see a 50 bps rate cut. Such a declaration could support buying interest in bonds even today and send yields down especially at the short end of the curve.

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Published on  Wed, Jul 30 2008, 07:37 GMT