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Erste Group: Weekly Focus Poland. Focus is on Central Bank decision. Monetary easing cycle to continue.

January 7, 2013
MPC to decide this week on interest rate level. We expect monetary easing cycle to continue with another 25bp cut to policy rate of 4.00%

The focus is on the Central Bank decision this week. On Wednesday, the MPC will announce the policy rate. We expect the council to lower the key rate by another 25bp due to the slowing economy, as evidenced by the latest economic releases – industrial output contracted in November by 0.8% y/y and retail sales grew by merely 2.4% y/y. Although we saw another bounce back in the PMI index to 48.5 in December, it remains below the threshold level of 50, suggesting that industry is still contracting and that it is too early to say that the trend is reversing.

Although the economic data is weak, there is only a low probability that we will see a cut greater than 25bp points. The dovish members remain in a minority in the council. If we did not see a 50bp cut after the surprisingly weak 3Q GDP figures (1.4% y/y), there is little chance that monthly releases will convince the MPC to undertake sharper moves.

As the 25bp cut is broadly expected, the market will be closely watching the MPC statement to find out about further policy directions. The biggest unknown at this point is whether the council will switch to “wait-and-see” mode in February (and continue to cut in March after the inflation projection is released) or whether it will continue with cuts to close the cycle with a policy rate of 3.75%.