Rates and FX Outlook - September 2014
In September's Rates and FX Outlook:
- The set of worrying signals that have appeared in the last two months, including disappointing data from Polish and European economies, plus possible effects of sanctions imposed on Russia and its retaliatory actions against European countries, convinced us to revise the economic scenario for Poland. While Polish GDP growth slowdown in Q2 was very mild, we are worried that coming quarters may see a continuing deceleration, instead of the recovery predicted earlier. We currently predict GDP growth to reach 3.1% on average in 2014 and in 2015 (versus previous forecasts 3.5% and 3.7%, respectively), with a few coming quarters below the 3% mark. Moreover, it seems that inflation will also be significantly lower – due to lower economic growth and the impact of Russian sanctions – and it will take longer until CPI growth rebounds from current sub-zero levels to the 2.5% target. We think the CPI may remain below zero even until the end of this year and will increase towards only 1.5% by the end of 2015E.
- Significant change in outlook for economic growth and inflation creates room for monetary easing, in our view. The Monetary Policy Council (MPC) will surely discuss a rate cut motion at the next decision-making meeting, the first after the holiday recess in August. Recent comments by several Council members suggested, however, that even though the number of arguments for policy easing is growing (and it would make sense to deliver a rate cut as early as this month) , they would rather not hurry with a decision in order to obtain even more evidence that an interest rate cut is needed. Therefore, we assume there will be no majority to support a rate cut at September's meeting. Still, in our view, in October-November we may see cumulative rate cuts of 75bp.
- Polish and European debt markets have rallied significantly in August, with yields falling to new all-time lows, supported by weak economic data, low inflation, and growing expectations that central banks will stimulate economies with more accommodative monetary policies. Despite a correction at the very end of August, triggered by rising geopolitical tension, as the Russia-Ukraine conflict escalated, we predict further decline in yields, given the currently expected scenario of NBP rate cuts and scope for more monetary easing in the euro zone. We think that 10Y bond yield may even drop to c2.7% shortly after the MPC delivers 75bp easing in October-November. After this happens, a gradual rebound is likely in the medium term, following trends in core markets.
- The zloty weakened vs. the main currencies in August as worries over the situation in Ukraine rose and odds for earlier rate hikes in the US increased. The medium-term outlook for the zloty has deteriorated in our view, due to a scenario of weaker GDP growth, fast and deep rate cuts, and higher geopolitical risk. We still predict the zloty to appreciate gradually in 2015, but in coming months the currency is likely to fluctuate along a horizontal trend.