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Central European Daily

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NBP cuts interest rates and stays in easing bias

Thu, Jun 25 2009, 09:05 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: The Czech koruna may extend gains in case of CNB´s no change verdict Fixed
Income: NBP cuts interest rates and stays in easing bias

Czech Republic

The Czech koruna recouped most of its Tuesday’s losses yesterday and the EUR/CZK dipped back to the 26.0 figure. This price action was rather a result of better sentiment global equity markets as the koruna moved in line with the forint for instance.

Today, all eyes will be on the Czech National Bank, which will decide on rates. We prefer the scenario that the CNB will stay on hold as the stronger koruna might prompt the CNB Board to vote for a rate cut, which is the market consensus. However if our scenario might occur, the koruna will receive another boost and the EUR/CZK pair will test the 25.85 support level.

The Czech yield curve steepened in a bullish fashion as the market probably has increased its bets on a rate cut today. Nevertheless the main even for the Czech market was an auction of the 15Y benchmark. The bid-cover ratio reached 1.35, which can be treated as a mixed result. Nevertheless from a government point of view, the less positive signal was that the average yield reached in the auction, was 6.112 % (around 170 above the swap curve).

This time, only five Members of the CNB Board will decide on rates (both Deputy Governors will be absent). Comments from CNB representatives ahead of the meeting did not clearly indicate whether and how the central bank’s rates might change. The factors in favour of another rate cut include the stronger economic recession and the very favourable short-term inflation outlook. The factors supporting rate stability, on the contrary, include the inflation horizon of the next 12-18 months, the weaker koruna and the wait-and-see attitude by the ECB. We primarily endorse the opinion that the CNB will wait for more data from the domestic as well as foreign economies, and leave rates unchanged at the moment. Of course, we cannot rule out a rate cut all together.

Since there is a slim majority of analysts who believe that there will be another rate cut today, we think that our scenario (if it materializes) could lead to a temporary bearish flattening of the Czech yield curve.

Poland

The Polish central bank cut interest on Wednesday to a new historical low at 3.5%, which was in line with our expectations. Beside that, it delivered a bit more dovish comments emphasizing the risks for growth. The central bank governor Slawomir Skrzypek confirmed also that the MPC retains an easing bias and further rate cuts were possible. Nevertheless the more influential swing voter Andrzej Slawinski was more cautious saying that he “does not really see much scope for further rate cuts”. Therefore, we don’t exclude a scenario in which this could have been the last cut in the easing cycle.

The Polish zloty was not affected by the dovish tone of the Monetary Policy Committee. It took profit from a certain rise in attractiveness of carry trades as the ECB send record liquidity into the European banking sector. Today the positive sentiment may prevail. Nevertheless it may be difficult to break below 4.50 EUR/PLN.

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Published on  Thu, Jun 25 2009, 09:16 GMT