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Raiffeisen Bank on Polish fixed income: No more surprises on the monetary policy front

November 9, 2012
Market comment 

With its 25bp rate cut the National Bank of Poland (NBP) this week delivered what was widely expected. The same holds true regarding the fairly dovish tone of the statements after the rate cut decision and the fairly conservative projections in the presented Inflation Report. According to this document (assuming unchanged interest rates) GDP growth in coming years will be below potential and inflation will decrease in next quarters to the inflation target (2.5%). Moreover, the indications from the inflation report suggest that the inflation rate may drop below the inflation target in mid-term. The previous report predicted an average inflation rate at the level of 2.7% in 2013 (now 2.45%). According to the current inflation report GDP growth will decrease to 2.3% in 2012 and 1.5% in 2013. Nevertheless, the 25bp rate cut leaves the impression that the NBP remains somewhat behind the curve and the outlook for more rate cuts and global market weakness caused some pressure on EUR/PLN (currently at the 4.17 level). 

Market outlook  

Next week the October CPI figures will be the most important data release. We expect a drop from 3.8% yoy in September to 3.5% yoy (consensus 3.4% yoy). Such a decrease of current inflationary pressure would be needed to support aggressive rate cut expectations that are priced in on the bond market at present. Hence any CPI reading above the 3.4/3.5% yoy level next week could induce a short-term correction on the bond market. Nevertheless, going forward Polish bonds should remain well supported by the current monetary policy stance. Some more pressure might me felt on the EUR/PLN exchange rate. However, currently we do not see the risk of a larger and more sustained correction in the EUR/PLN exchange rate (i.e. to levels well beyond 4.20).