Economic Analysis

In today's Eyeopener:
 
- Today Polish MPC decides on interest rates, services PMIs and ISM, ADP report
- CEE currencies under pressure of stronger US dollar, EURUSD stable below 1.05
- Domestic bonds stronger, other market rates up, US bond sell-off continues

(...) The key domestic event of the coming week will be the MPC meeting (decision on Wednesday, NBP governor's conference on Thursday). The strong fall in CPI in September will probably be proclaimed a confirmation of the end of the high inflation era, giving an argument for further rate cuts. Given recent statements by representatives of the government, and later also the central bank, indicating concerns about a possible depreciation of the PLN, a 25bp cut is most likely in our view. A larger scale of reduction would, in our view, be negative for the currency, and it would be difficult to count on this being neutralised by the hawkish tone of the communication: after two consecutive decisions diverging from earlier signalling, it would make little sense to listen to further guidance. (...) 

Polish Monetary Policy Council cut interest rates by 25bp, the main rate to 5.75%. The press release stressed that the demand pressure and cost pressure remain low. It also mentioned that most of external supply shocks are gone by now and that economic activity is now low (the September communique mentioned it was getting lower), which should support a further decline of CPI in the following quarters. The MPC calls the October rate cut an adjustment which suggests that the Council does not think in terms of the whole easing cycle but rather wants to to react to incoming signals from the economy. It seems to us that the MPC is ready to deliver more easing if inflation continues to fall. Given that our October CPI forecast shows inflation shrinking below 7% y/y we tend to think that the next meeting will also end with a rate cut. 

The tug-of-war between market players who foresee an imminent global recession that would force central banks to cut interest rates quickly, and those expecting inflation to remain stubborn, thus making interest rates stay 'higher for longer', continues. The US economy still seems to be evading a recession, while in Europe negative signals prevail, prompting a downward revision of economic growth forecasts. On both continents, central banks are apparently approaching the end of their monetary tightening cycles, but the question of when they will begin to reverse those cycles remains open. In our view, no sooner than 2H2024 – both ECB and Fed are clearly prioritising inflation over GDP growth. The normalisation of interest rates is led by Latin America, and in September, the National Bank of Poland followed in their footsteps, surprisingly cutting its reference rate by 75bp. (...)

In September's Rates and FX Outlook:
 

• Poland’s GDP growth failed to accelerate in 2Q16, with investments surprising negatively (-4.9% y/y), and we think that the second half of the year will see no significant improvement in economic growth. Although private consumption is likely to gain strength in the coming quarters, supported by solid labour income and the new child subsidies, it may take time until investments recover, and the positive impact of net exports will be hard to maintain (export growth may decelerate and imports accelerate). We expect a more significant investment pick-up next year, but by then the impact of the 500+ child benefit programme on consumption will be dissipating. Therefore, we forecast that GDP will grow 3.1% in 2016 and 2.9% in 2017.