BZ WBK Rates and FX Outlook - March 2015
In March Rates and FX Outlook:
- Poland's Monetary Policy Council (MPC) kept interest rates on hold in February, but it also made it clear that a decision to ease monetary conditions is coming closer and that a cut, or cuts, could exceed 25bp. The central bank conditioned a decision on an extension of the expected period of deflation, which is very likely in our view. In March, new central bank projections are due for release and they will most likely show deeper and longer deflation, compared with the previous forecast from November. At the same time, central banks around the world are on a monetary easing spree: At least 20 have eased policy so far in 2015, aiming to drive down their currencies and/or address deepening deflation. All these factors create room for monetary easing in Poland, in our view. We think it is very likely that the MPC will cut its main interest rates by 25bp in March and may cut again by 25bp as soon as April. While a 50bp rate cut in one move cannot be ruled out completely, we think that two cuts of 25bp are more likely as geopolitical risk persists (an escalation of the conflict in Ukraine cannot be ruled out) and data on real economic activity are not bad.
- In fact, there are many signs that the Polish economy is faring better than expected. The labour market is in full upswing (with unemployment approaching pre-crisis levels and decent real wage growth), which should keep supporting private consumption. The impact of CHF appreciation on consumers should be insignificant. Recent data from the Euro zone suggest that the economic outlook in Europe is improving, helped by lower oil prices, the weaker euro and the ECB's QE. Even though the recent high-frequency data showed some signs of slowdown in Poland at the start of the year (we predict that GDP growth in 1Q15 will be below 3%YoY), it seems the deceleration should be relatively mild and short-lived.
- The bond market saw a correction in February, triggered by worries about Greece (and probably partly by signs of recovery in the Euro zone), but we think that once the ECB starts large-scale buying of sovereign debt, which should absorb a large part of new bond supply in the Euro zone, European yields may come down again in the nearest months. An upward correction is possible in the second half of the year, as the economic recovery strengthens and the Fed's interest rate hike comes closer.
- We expect EUR/PLN to move sideways in the coming weeks. We think the zloty has limited scope to appreciate given expected interest rate cuts in Poland and continuing geopolitical risk (uncertainty about Greece, albeit lower, has not disappeared, while the risk of escalation of the conflict with Russia seems to be rising), among other things. The zloty may resume its rise in 2Q, assuming signs of economic recovery become more apparent, global sentiment improves and the ECB runs a fully-fledged QE programme.