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As we expected, the last week was marked by depreciation of the zloty and rise in market interest rates. The zloty weakened despite no change in EURUSD and the fact that outcome of the MPC meeting proved more hawkish than expected by the market. As it was widely predicted, the MPC left rates on hold, but tone of the post-meeting official statement and comments from rate-setter proved more hawkish than expected by the market. In fact, as we have indicated, overall message from the Council did not differ much as compared to the previous month. Door for more monetary tightening are still open. We expect that in August the CPI inflation rose to around 5%, net inflation to around 4% and the CPI less food and energy prices to above 2.5%, while wage growth remained at two-digit level, which should persuade the Council to tighten monetary policy again. An encouraging factor for some additional tightening were stronger than expected GDP numbers for Q2.
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However, we think that more and more numerous indications of economic slowdown in the next quarters (last week brought slightly weaker than predicted retail sales for July, fall in consumer confidence indices for August and confirmation of weakening in labour demand growth) will not enable to convince rate-setters to more than one hike this year.
This week we expect slight recovery of the zloty, although EURPLN may temporarily test again the level of 3.36, which was shortly broke on Friday. The domestic currency should be supported by upward correction in EURUSD expected by us. The local interest rate market will be influenced by release of the FinMin’s inflation forecast for August and performance of the core debt markets amid many crucial events scheduled abroad.
Download: Weekly economic update 1-7 September 2008
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