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Central European Daily

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Polish central bank signals possible rate hike

Thu, Aug 28 2008, 07:37 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: Czech real wage growth at ten year lows keeps koruna under pressure
Fixed Income: Polish central bank signals possible rate hike

Currencies

The Polish zloty continued to lose ground in yesterday’s session, as regional sentiment deteriorates and despite the Central Bank re-affirming its tightening bias. EUR/PLN moved from about 3.33 to 3.3370 during the session. Following the MPC press conference the zloty started to rally, but it never went far and soon resumed its gradual weakening. At the time of writing, EUR/PLN jumps to 3.3460, testing the 18 August high. A break would confirm the worsening climate and suggest further zloty losses. The Polish Central Bank said that it hadn’t changed its view that interest rates may have to be raised to bring inflation down, despite evidence that the economy had entered a gradual slowdown. The decision was widely expected and also left little traces in the bond market.

The Czech koruna stayed under considerable pressure on Wednesday. That could have been partly because of low real wage growth that hit a 10 years low. Only 1.1% growth in real wages partly explains slower GDP growth in the second quarter. It also leaves open space for further rate cuts, which is an important negative mid-term factor for the koruna. Yesterday the pair moved as high as 24.67 EUR/CZK also because rather deteriorating sentiment despite weakening US dollar.
It might be difficult for the Czech currency to recover from recent losses even in the case of further weakness in the US dollar. In the short term we rather start to bet on testing 24.80 EUR/CZK.

The Hungarian forint remained unchanged after the Prime Minister announced tax plans to improve Hungary’s competitiveness. The currency continued to trade within EUR/HUF 235 and 237 with a bit of an easing bias towards the end of the day as USD appreciation weakened emerging Europe currencies.

The 4-year plan targets a HUF300bn (roughly 1% of GDP) tax cut per year or overall 1000-1200bn. Implicitly, the program could rely on an expenditure freeze in real terms and on GDP growth to grow-out taxes. A cautious 2% growth assumption (or that additional revenues would be spent on wages) would imply 1pp reduction of the tax burden per year given Hungary's high, roughly 50% tax/GDP ratio. Exactly the same 1% tax reduction targeted by the program, so we would interpret this as a spending freeze and gradual tax lowering based on growth.
The good news is that this economic policy rule means keeping the budget deficit unchanged, which is positive for us given the track record of large pre-election spending sprees. The problem is that this rule may not be enough for recovery. A speed of 1% tax cut per year would require 10-years to catch-up to regional peers with 35-40% tax/GDP ratios and that is too long a period for Hungary.

The Slovak koruna held stable close to the level EUR/SKK 30.30 yesterday lacking any impulse and is also expected to stay in this trading pattern today. The economic calendar contains July PPI, traditionally no market mover. The Y/Y rate is expected to decelerate to 6.0% from 6.3%. Slovak markets are closed for national holiday on Friday and Monday; trading will resume on Tuesday, September 2.

Fixed income

Czech bond trading volumes slowly increase as the holiday’s season nears its end. Yesterday’s wage development showed a very slow increase. Such figures support rumors that the CNB could cut rates again. Although inflation worries remain, the Czech shorter maturities managed to post gains. The longer end tracked the performance of German bund and the yields increased by 5 bps.
No new statistics are released today. Low wage pressure may keep short end yields lower even today and the curve could continue to steepen.

Hungarian bonds weakened slightly as foreign players were cautiously selling paper. The interest for Hungarian fixed income market subdued significantly in recent days, while currency weakening could be a risk for now. The medium-term outlook is still positive in our view, but politics around the budget discussion could keep investors on the sideline, which may open the way for weakening in September-October.

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Published on  Thu, Aug 28 2008, 07:44 GMT