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Central European Weekly

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The NBP probably finished its rate cut cycle

Mon, Jun 29 2009, 11:00 GMT
by KBC Market Research Desk

KBC Bank

Next report should be on 13th July

Czech Republic

The CNB leaves rates unchanged

Poland

The NBP probably finished its rate cut cycle

The Week Ahead

No eye-catching events in Central Europe this week

Overview

NBH and NBP match expectations, CNB surprises

Another week has come and gone, bringing to a close a series of interesting central bank meetings in Central Europe. The past five business days saw two decisions that met market expectations and one that surprised markets (but not us).

fpersists, which is an open question.On Monday the National Bank of Hungary held its policy meeting. The NBH’s decision to leave interest rates unchanged at the fairly high level of 9.50% was no surprise whatsoever. The NBH Board had no reason to send markets any strong signal to assure them that a cut in its base interest rate was drawing near. The reason is the anticipated inflation rise in the second half of the year, triggered by an increase in VAT rates. On the other hand, we cannot ignore that, even so, the NBH gave some hope to the market that it might cut its base interest rate, if the existing positive sentiment on the financial markets persists, which is an open question.

The second central bank meeting was that of the National Bank of Poland (NBP), whose decision was also in line with markets, as the bank cut its base interest rate to a record-breaking 3.50%. The Monetary Policy Council (MPC) of the NBP thus reacted to a worsened macroeconomic outlook. Nevertheless, the subsequent fairly hawkish comments from key MPC members indicated that this might be the bank’s last rate cut for this economic cycle.

However, the most hawkish signal of last week was in the end sent by the Czech National Bank and it clearly innervated part of the market. The CNB not only failed to cut rates, contrary to expectations by most analysts, but the optimistic tenor of its comments at the press conference even created the impression that the CNB Board was not going to cut rates anymore. Nonetheless, we expect that the decline in inflation, the persisting underperformance of the economy and the relatively strong koruna, will help most CNB Board Members come down to earth and cut rates again. The upcoming macroeconomic forecast (to be released in August) may thus offer a good reason for the CNB to cut its repo rate, truly for the last time.

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Published on  Mon, Jun 29 2009, 11:47 GMT