Hawkish NBP Set to Stay on Hold

With inflation still above the Polish central bank’s official inflation target of 2.5% and the Polish economy still growing relatively strongly, the NBP’s Monetary Policy Council (RPP) has turned decisively more hawkish in its rhetoric. The more hawkish rhetoric should also, undoubtedly in our view, be seen in light of the sharp sell-off we saw in the zloty prior to the new year and, even though the zloty has rebound strongly since then, the RPP probably still sees a risk of a renewed sell-off in the zloty. Looking ahead, we expect the RPP to be slightly less hawkish than the present signals indicate, as the rebound in the zloty should ease inflationary pressure. Furthermore, with both the ECB and the Federal Reserve in an “easing mode”, the outside pressure for rate hikes is not there.  As a consequence, we expect rates to be kept on hold next week, in line with consensus.

Rouble FX update

The Russian rouble has been a strong performer since the beginning of 2012. It is at its peak in a year. Partly it comes from the rising oil price. Partly it comes from the Central Bankof Russia’s (CBR) passive role: less intervention, more inflation targeting. Tax payments have supported the rouble too.

We do not see any significant risks from oil price development. It looks to us as though the oil price will remain around USD105-110/bl on average in 2012. In our view, all the political risk has already been priced into the rouble and Russian stocks. However, in the short  term we would be cautious. CBR may come verbally in the monetary policy meeting this or next week. Then there are elections this Sunday. They can easily bring some nervousness. On the FX market “the risk on” mood has existed for a while thanks to LTRO I. LTRO II may influence the global mood in the near future and put in for more risk helping the rouble. Our forecast looks very realistic for the moment (EUR/RUB 3M 39.1, 6M 38.8, 12M 39.6). We do not expect the euro to fall below RUB38 this year on average or surge above RUB41.

Baltic macro update
Next week, we are due to see the inflation figures for February for the all Baltic countries. Below we cover each of the Baltic countries and their indicators.

We estimate Estonian CPI inflation decelerated to 4.0% y/y in February, down from 4.5% y/y in January. The energy and food CPI component continues to play a major role in overall consumer price development. We expect to see a continuation of the down trend in inflation in  coming months; we forecast  average CPI growth for 2012  of 2.8%. However, there is some upside risk related to global oil price development. Regarding the CPI trend for next year, inflation is likely to remain at this year’s level. This is due to the liberalisation of the electricity market – although the exact information has not yet been submitted, Eesti Energia has said the electricity tariff could go up by 50% on average.

We estimate Lithuanian CPI growth in February accelerated to 3.7% y/y, up from 3.4% y/y in January. It is likely that the greatest impact on inflation in February will come from higher oil and heat energy prices. Inflation  is likely to have reduced saeasonal winter clothing and footwear sales. We expect to see a deceleration in CPI inflation this year to 2.8% y/y, as domestic demand pressure is likely to be subdued, although rapidly rising commodity prices could put upward pressure on inflation, at least in the short term.We estimate Latvian CPI inflation was flat in February, at 3.6% y/y, due mostly to the base effect. We expect a further decline in consumer prices  this year due to weak domestic demand pressure and a more favourable global commodities outlook. According
to our forecasts, inflation in Latvia this year will be around 2.6%.