BZ WBK Rates and FX Outlook - November 2014
In November's Rates and FX Outlook:
- Recent economic data from Poland were not as bad as the previous month, but they still pointed to a deceleration of GDP growth in 3Q, probably to slightly below 3% YoY (flash 3Q data is due in mid November). The worsening international economic climate, especially in the Euro zone, is the main trigger of a slowdown. Meanwhile, domestic demand is still showing signs of relative strength. The continuing improvement in the labour market supports the growth of households' income and consumption and, in our view, reflects the underlying upward trend in investments. This is confirmed by continuing growth in loans for consumption and for investment, among other things. The latest PMI index for the Polish manufacturing sector also showed a clear rebound in October, mainly on the back of improving domestic orders, suggesting that domestic demand is buoying the economy. Inflation remains below zero and may drop even further before starting a gradual rise at the beginning of next year.
- The Monetary Policy Council (MPC) took the market by surprise, cutting interest rates more than expected in October. The reference rate was trimmed by 50bp, the lombard rate by 100bp and the deposit rate was unchanged. We think that the decision to cut more deeply was better than the alternative of a gradual cycle of 25bp reductions, which we had expected the council to deliver. In our opinion, the decision in October was a very close call and the casting vote of the NBP governor may well have determined the cut. Thus, building a majority for further monetary easing may be difficult. However, we think that the new NBP projection (which the MPC will have available at its next meeting) will show considerably lower GDP and inflation forecasts, giving the Council arguments to cut interest rates again in November, this time by 25bp. The statement will probably leave the door open for further easing if the economy deteriorates.
- The market is currently pricing-in a 25bp rate cut at the next MPC meeting and slightly more than a 50bp reduction in total over the next three months. So, the scope for further gains in the fixed income market seems limited, although some move is still possible, given our low CPI forecast (-0.5%YoY in October). If the MPC opts for another 50bp rate cut in November with a statement signalling that the cycle of easing is over, the trend in the fixed interest market may reverse.
- We see two opposite forces at work on the EUR/PLN rate. On one hand, there is an inflow of foreign capital to the Polish bond market, amid expectations of an ECB liquidity injection and further rate cuts in Poland. On the other hand, the Russia-Ukraine crisis continues and media reports of intensified Russian army activity makes the CEE region less attractive. We expect a gradual appreciation of the zloty in the coming quarters as the slowdown in the Polish economy proves only temporary and the MPC concludes a short rate-cut cycle. Geopolitics is the main risk. Fed policy and USD strength also generate a short-term risk, but this should be offset by increased liquidity in the Euro zone monetary system.