The outcome of next week’s Monetary Policy Council (RPP) of the Polish central bank (NBP) should not catch us by surprise unlike last time when it unexpectedly decided to raise its key policy rate by 25bp to 4.75%. We expect the RPP to maintain the key policy rate at 4.75%. This outcome is in line with the consensus expectation.
The situation on financial markets due to the escalation of the eurozone crisis worsens every day. We believe the NBP is not immune to this and expect it to deliver much softer rhetoric. However, we do not believe it will acknowledge any wrongdoing in its decision to hike interest rates last time. Nonetheless, given that things in the eurozone are deteriorating quickly and that the growth outlook looks less and less rosy, the NBP could, sooner or later, be forced to reverse its monetary policy and cut rates in the coming months.
Inflation in Turkey remains far above the target
Turkish inflation for May is on the agenda next week. Even though inflation is likely to show a remarkable drop (we forecast a decline from 11.1% in April to 9.8% y/y in May), it will remain way above the inflation target of 5% for the rest of the year. With elevated inflation but at the same time a weakening of the Turkish lira and negative impact of domestic growth from an uncertain global growth outlook, the Turkish central bank (TCMB) should maintain a flexible monetary policy with a tightening bias via widening the interest rate corridor and using liquidity operations. Furthermore, at this week’s monetary policy committee meeting, the TCMB decided to raise the proportion of Turkish lira reserve requirements that banks can hold from 40% to 45%. Furthermore, the upper limit of TRY required reserves could be raised from 45% currently to 60% in 5% steps. According to Governor Erdem Basci, these incremental increases would work as an automatic stabiliser, reducing the volatility of the TRY exchange rate.
Summing up, through these measures, the TCMB aims to be more responsive to current turbulence on financial markets on the back of the escalating eurozone crisis, which causes high volatility and puts strong depreciation pressure on the TRY. The Turkish lira currently continues to be hard hit by the deteriorating financial conditions.
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