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Central European Weekly

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Polish central bank shifts to a neutral mode

Mon, Nov 2 2009, 12:50 GMT
by KBC Market Research Desk

KBC Bank

Czech Republic

Rate cut likely when the central bank meets this week

Hungary

Profit-taking send the forint to the key EUR/HUF 275 level

Poland

Polish central bank shifts to a neutral mode

The Week Ahead

Another CNB 25 bps Rate Cut on the Horizon, but Nothing More

Overview

Central Banks at the Czech-Polish Crossroads

Every week, Central Europe proves to the investors on Wall Street and London’s City that it is not a uniform region, where economies can be easily lumped together. The latest evidence is the divergence of the monetary policies in Poland and the Czech Republic.

Last week, the National Bank of Poland, after the release of a new inflation forecast, sent the clear message that time has come for a re-orientation of monetary policy and that markets should no longer hope for an easier policy stance and rate cuts. Inflation remains high and the Polish economy, as the sole exception in the entire European Union, has actually avoided recession, as delimitated by negative growth rates. Even better, the economy is showing signs of recovering. So, the central bank sees inflation risks. Therefore, we expect stable rates in the final months of 2009 that will at some point in 2010 followed by a gradual tightening of policy in 2010.

The Czech Republic also sees the first signs of recovery but, given the greater openness of the Czech economy, its economic decline was deeper and its recovery is also likely to be slower. In addition, the Czech Republic is far from being encumbered with increased inflation and is more likely to struggle in keeping inflation in the positive in the next months. The dovish statements by Governor Tůma and Deputy Governor Singer were inspired by fears of an undershooting of inflation compared to the target. Apart from the possibility of another rate cut, on which we definitely count, the central bankers will also discuss alternative options for a further easing of monetary policy, like direct forex interventions against the koruna. However, these should be avoided, because this threat and verbal interventions alone have already weakened the Czech currency significantly over the last month and eased the inappropriately tightened monetary conditions.

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Published on  Mon, Nov 2 2009, 12:55 GMT