NBP to keep rates on hold for the moment

ANALYSIS | 04/15/2015 08:57:24 GMT

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NBP to keep rates on hold for the moment…

… although Polish deflation persists

A strong demand for CE bonds and currencies was evident again yesterday. Yields of regional government bonds were falling; for example, Czech government bond yields with maturities of 5 years and shorter fell into a negative territory. Rally also continued in case of CE currencies. The zloty again tested technical barrier at 4.0 against the euro and the EUR/HUF briefly dipped below 296 (the strongest value since December 2013).

Regarding today’s session, the meeting of the Polish central bank (NBP) together with Polish inflation figures will be in focus. The NBP is likely to leave rates unchanged. After the 50 bps rate cut in March, Governor Belka made clear that monetary easing is over. However, the zloty has strengthened quite significantly since then. The question is whether the NBP - facing a significant inflow of funds from abroad - will change its rhetoric. The strong zloty may continue to keep the economy in deflation for longer than had been previously anticipated and could even undermine inflation expectations.

Lack of inflation pressures in Poland should also be confirmed by inflation figures. We estimate the Polish economy remained in a deep deflation in March. We believe that prices of consumer goods fell by 1.5 % y/y, which corresponds with 0.2 % m/m growth. Just as in previous periods, the price fall was mainly attributable to low oil and food prices. The latter reflects last year’s good harvest.

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