BZ WBK Rates and FX Outlook - February 2015
In February's Rates and FX Outlook:
- The Monetary Policy Council kept interest rates on hold in January, but changes in the official statement and comments by the NBP governor at the press conference suggested, in our view, that the majority of the Council members could vote for more policy easing should new data confirm deeper and longer deflation and weaker economic growth. While we expect this scenario to materialise in the near future, the most recent data releases were still quite decent (showing a labour market recovery, strong industrial output, a surge in manufacturing PMI, relatively strong GDP in 2014), so there will probably not be enough arguments to convince the majority of MPC members to cut rates as early as February.
- Even though the most recent Polish data were surprisingly positive, the outlook for the global economy is uncertain, which is why many central banks around the world are considering further policy easing. We still think that an interest rate cut in Poland is likely in March, when the central bank's latest medium-term projections will be available, probably showing much lower inflation and meagre GDP growth ahead. New high-frequency data, to be released before the March MPC meeting, should also support the case for policy easing, as we predict a sharp drop in January's CPI and a weak industrial output reading. The Polish central bank recently signalled very clearly that some MPC members' key argument against further rate cuts is their concern about financial stability. In this context, a cut is also more likely in March, when the financial markets may have stabilised after the turmoil caused by the unexpected Swiss National Bank (SNB) decision and the Greek election.
- The Polish interest rate market has started betting aggressively on further monetary easing. The FRA market is currently pricing in a 75bp rate cut over the nearest six to nine months. If there is no cut in February, expectations of one in March will increase. The larger-than-expected scale of the ECB's QE and some disappointing US data, which softened the FOMC rhetoric, are likely to continue to support the global fixed income market. The new global environment has led us to lower our predicted yield paths for the rest of the year and we see scope for further yield reductions in the nearest months.
- The zloty has been highly volatile in recent weeks. The SNB's decision to drop the 1.20 floor for EURCHF caused a major depreciation of the Polish currency, especially versus the Swiss franc. EURPLN touched 4.33, its highest level since July 2013. At the end of the month, PLN was supported by the ECB's decision to start quantitative easing and the EURPLN exchange rate slid below 4.20. We think the Polish currency should appreciate gradually in the coming months on the back of stable rates in February, the still-relatively-decent performance of the Polish economy and larger-than-expected ECB QE, which boosts global appetite for risk. The moves in first half of the year should be relatively small and we expect the zloty appreciation to gain pace only in 2H15.