CNB To Cut To Zero And More To Come

A number of monetary policy setting meetings are due in the EMEA region next week. Probably one of the most interesting is in the Czech Republic, where we expect the Czech central bank (CNB) to cut the key policy rate from 0.25% to the absolute bottom - to zero.

Will the CNB deliver more than a rate cut next week? Given that the CNB still has some room to use interest rates, we think it will cut the key policy rate to zero next week. Apart from this, we believe the CNB is likely to announce that further monetary easing is warranted based on the new inflation outlook (new inflation and GDP forecasts are due to be revealed next week). However, we find it unlikely that the CNB will announce a temporary target for the CZK to weaken the CZK or provide details of possible intervention in the FX markets.

We must stress that the risk of a substantially weaker CZK has increased markedly. We therefore recommend being short CZK going into the next week.

Hungarian central bank ready to cut again
The Hungarian central bank (MNB) is broadly expected to cut by another 25bp to 6.25% at next week's monetary policy council meeting. Considering that the council is firmly in the hands of government-appointed council members, we expect the MNB to continue monetary easing in coming months - despite a further increase in Hungarian inflation to 6.6% y/y in September - well above the MNB's official inflation target of 3.0%.

Bank Rossii faces dilemma: once again
Bank Rossii, Russia's central bank, will hold a policy meeting during the first nine days of November. We expect a 25bp increase in the refi rate to 8.50% and a 25bp hike in other policy rates, as the central bank has continually stated that inflation is above its target (5-6%).

Lithuania maintains decent growth
We believe Lithuanian GDP growth accelerated in Q3 12 to 3.0% y/y, up from 2.2% y/y in Q2 12. The poor Q2 result was affected by one-offs, such as the suspension of operations at the ORLEN Lietuva oil refinery, while exceptionally good agricultural results should support the Lithuanian economy in Q3 as well.

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