BZ WBK Rates and FX Outlook - December 2014
In December's Rates and FX Outlook:
- The Monetary Policy Council (MPC) has kept main interest rates on hold in November, even though the new central bank projections definitely supported additional policy easing, with downward revisions to GDP and inflation forecasts. The policymakers have clearly signalled their focus has moved from inflation to the growth outlook and it seems likely that most of the Council members see GDP prospects as more optimistic than those outlined in the last NBP projection. At the same time, they see the main drivers of low inflation as supply-side in nature, which cannot be addressed by domestic interest rates.
- As most of the economic data released last month surprised on the upside, it would seem quite irrational to expect the MPC to change its mind and support an interest rate reduction at the December meeting. However, it should be noted that the Council is not a uniform body but a panel of ten policymakers, who are apparently deeply divided in their opinions about the optimal policy decisions. This is reflected by, among other things, the fact that there were three rate-cut motions submitted at the meeting in November: -100bp, -50bp, -25bp, none of which gathered enough support. But it shows that some of the central bankers still see substantial room for monetary easing. Judging by the last MPC press conference and by MPC members' recent comments, we guess that November's decision was a close call and it was probably a change in the opinion of just one MPC member that determined the decision (October's rate cut was passed due to the NBP governor's casting vote with support 5:5). While we do not expect a rate cut in December, we think there is still room for at least minor monetary policy easing, as – despite better-than-expected data on economic activity – inflation forecasts are still falling. We predict that 12M CPI will remain below zero at least until mid-2015 and that inflation will not return to the target until the end of 2016.
- An MPC decision to leave rates unchanged in December may trigger a further correction in the short end of yield curve. However, the move could be short-lived, as the next data releases (which could confirm sub-zero inflation and a drop in production) may fuel hopes that monetary policy adjustment is still possible in the near future. Yields at the long end of the curves should stay low, amid expectations of QE in the Euro zone.
- Despite positive surprises from macro data releases (GDP, PMI, labour market), the EURPLN has remained relatively stable. This situation is likely to continue in the nearest weeks as, in our view, the balance of risk for the currency is fairly symmetric for December.