Belka signals wait-and-see stance

Yesterday, the Polish central bank (NBP) unsurprisingly kept its key policy rate unchanged at 2.5%. Equally unsurprisingly, the NBP signalled that it would remain in a wait-and-see position for some time to come and would ‘monitor data until the end of December’. We think this is a clear signal that the NBP will not change interest rates in the near future.

However, this is also more or less reflected in market pricing. We think that inflation is likely to inch down further in the coming month – somewhat below 1%, below the NBP’s official 2.5% inflation target. Therefore, if anything, we expect the NBP to soften its rhetoric again later in the year even if for now it seems to be convinced that the next move on interest rates will be up rather than down. That said, the NBP is not so hawkish that it would not restart the rate cutting cycle if the data turned worse and in line with the NBP, we expect quite a weak recovery in Polish growth in the coming year. We continue to think that the risk to interest rates is on the downside in the coming 6-12 months.

Syrian shadows over Turkish markets

Any headline that increases or decreases the likelihood of a US-led attack on the Assad regime in Syria continues to have a significant impact on the Turkish markets. Hence, earlier this week when Russian sources reported that missiles had been fired in the Mediterranean, it immediately spooked the Turkish markets. In our view, this is a clear sign that even though we no longer believe that the Turkish lira is fundamentally overvalued, significant downside risks to the lira remain and any attack on Syria is going to have a negative impact on the currency – at least in the short term.

The increased geo-political tension combined with continued uncertainties regarding the political situation in Turkey itself in light of the demonstrations earlier this year and next year’s elections are very likely to have a negative impact on Turkish growth. However, it is very hard to quantify the impact of these shocks.

In light of these developments and equally importantly given the Turkish central bank’s de facto tightening of monetary conditions to curb the sell-off in the lira – we have adjusted down our growth expectations for the Turkish economy.

We now expect GDP growth this year of 3.4% y/y (down versus 4.0% y/y previously), 3.2% y/y in 2014 (versus 4.1% y/y previously) and 3.8% y/y in 2015 (versus 4.3% y/y previously). See the side bar for our updated macro outlook on the Turkish economy.