Weak Polish Economy Dictates More Rate Cuts

Earlier this week Polish central bank governor Marek Belka said that the Polish central bank could intervene to stabilise the zloty. We find the comments somewhat odd for two reasons. First, the recent 'weakness' in the zloty really mostly reflects euro strength rather than zloty weakness. Hence, the zloty has been holding up very well about the US dollar. Second, if anything, the Polish economy needs monetary easing rather than the opposite and therefore Belka should really welcome zloty weakness. Overall we are not looking for the zloty to weaken a lot more but the strengthening trend in the euro remains intact so at the least for the short term we could see the zloty continue to 'soften' against the euro.

The recent flow of bad macroeconomic data warrants further monetary easing and we strongly believe that the NBP will deliver another 25bp rate cut next week. Despite Governor Belka's quasi-hawkish comments over past month, we expect to see more rate cuts going forward. The Polish economy is simply slowing too much for the NBP to ignore it. That, however, is also the market expectation so we would not expect that in itself to trigger a further weakening of the zloty.

CNB to discuss detailed plan for FX interventions

The Czech central bank's (CNB) monetary policy board meeting next week will be interesting. Given that the CNB has exhausted standard monetary policy tools such as interest rate cuts (the key policy rate is at technical zero of 0.05%) and that negative interest rates are not really an option in the Czech Republic, we believe that the board meeting next week will be devoted to discussing FX intervention in detail. The CNB made it clear that if more monetary easing is warranted, the bank will probably use the exchange rate channel. The CNB has tried to talk down the Czech koruna over the past couple of months and it to some extent has succeeded.

However, in our view, the current CZK level is not enough for effective monetary easing. Hence, we still believe that the CNB will be forced to intervene to weaken the CZK more aggressively and next week the CNB board will probably vote on whether the CNB should use the exchange rate channel as a non-standard monetary policy tool. In our view, the FX interventions will get a tight majority: however, we also acknowledge that not all the CNB board members think that further easing is needed or the use of exchange rates is appropriate as monetary policy tool.

So what can we expect next week? Apart from the downwardly revised GDP forecast for 2012 and probably also 2014 (2013 GDP forecast is likely to stay unchanged) which will be revealed next week, the CNB could in fact refrain from providing too many details about future monetary policy. It could potentially say that the board is in favour of FX interventionas a new tool but at the same time one should not expect the CNB to provide any timetable for intervention or any CZK target.

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