Hopes of Geopolitical De-Escalation Lift Russian Markets
On Wednesday, news was released of what seemed to be at least a minor de-escalation in the geopolitical tensions in Ukraine after the Ukrainian president Petro Poroshenko announced that he had agreed with Russian president Vladmir Putin on a permanent ceasefire in Donbass (eastern Ukraine).
In conclusion, we might have seen the first signs of a de-escalation in the Ukrainian crisis, but it is far too early to conclude anything. We therefore continue to recommend that investors show the utmost caution in the central and eastern European markets - particularly in the Russian markets, as the risk certainly remains that the crisis could re-escalate again ahead of the Ukrainian parliamentary elections in October.
Marek Belka nearly promises a rate cut in October
We had forecast that the Polish central bank (NBP) would cut its key policy rate by 25bp at yesterday's Monetary Policy Council (RPP) meeting. However, the NBP left its key policy rate unchanged. However, at the press conference following the rate decision, NBP governor Belka acknowledged that a rate cut had been discussed and furthermore strongly hinted that we could get a rate cut at the next RPP meeting in October.
We find it highly likely that the NBP will deliver a 25bp cut in October. Furthermore, we believe the rate cutting cycle will be continued in November with another 25bp cut. Indeed, we believe even more aggressive action from the NBP would be justified, but given the extremely reluctant move towards monetary easing we have seen so far, we doubt this will happen.
Deflationary Pressures In CEE Increase
Next week, inflation numbers for Hungary, the Czech Republic and Romania will be released. Polish inflation data will be published in two weeks. The story here remains the same. The deflationary pressures are strengthening. While we expect the Czech inflation in August to remain unchanged at 0.5% y/y versus July, inflation in Hungary will dip below zero again and we expect headline inflation of -0.1% y/y. Furthermore, we expect deflation in Hungary to deepen quite considerably in the coming months, but especially the last two months of the year. However, the biggest deflationary pressures are mounting in Poland. We expect August deflation to fall further down to -0.5% y/y, from July's -0.2% y/y.
To Read the Entire Report Please Click on the pdf File Below