NBP Cuts But Still Too Hawkish

This week the Polish central bank (NBP) surprised investors (and analysts) by cutting its key policy rate by 50bp to 3.25%, rather than the 25bp that had been expected. This was surprising as NBP governor Marek Belka, in particular, had sounded quite reluctant about further rate cuts ahead of the meeting. His reluctant stance had even led some analysts and market participants to believe that the NBP would not cut at all.

Overall, we put a lot of the blame for the slowdown in the Polish economy on the NBP, which has been overly hawkish since early 2012 and with this week's communication the NBP continues to be overly hawkish given the state of the Polish economy. As a consequence, it is pretty clear that the NBP will not cut rates at next month's Monetary Policy Council meeting. However, the macroeconomic data in our view is likely to force the NBP to restart the rate cutting cycle in coming months - and this could be sooner than the market is currently pricing in. In our view, this gives some short-term (three to six months) risk of renewed zloty weakness and we would certainly not rule out EUR/PLN inching above 4.20 on a six- to 12-month horizon due to a fairly bleak outlook for the Polish economy.

The Matolcsy Effect -- It's Not A Positive Effect
The Hungarian forint has been somewhat under water lately and is underperforming its regional peers. It is pretty clear this is because the former Minister of Economics Gyorgy Matolcsy has been appointed the new central bank governor. Matolcsy is the main architect of the Hungarian government's highly unorthodox economic policies and the fear in the markets is clearly that Mr Matolcsy will undertake a dangerous experiment with Hungarian monetary policy. We are certainly not fans of his economic ideas and we share markets' fears about what kind of experiments he might undertake as central bank governor. On the other hand, it is no surprise that he has been appointed MNB governor and furthermore our fundamental medium-term models actually indicate that the forint is undervalued. Therefore, we caution against panicking but near term we could easily see more HUF weakness.

Longer term, we would rather focus on 'operational risks' in the Hungarian market, as there is no doubt that Mr Matolcsy has strongly interventionist instincts. Therefore, we would not rule out the Hungarian central bank and government moving to implement currency and capital controls if the forint receives 'excessive' pressure. Even though this is not our main scenario, we believe it is a risk that should not be ignored by investors.

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