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Erste Group: Weekly Focus Poland

February 4, 2013
All eyes on central bank, but there will be no surprises; council will lower rate by 25bp.

While recent monthly releases were disappointing and negatively surprised the market, the GDP figure came in at 2%, in line with expectations. The economy is weak and we expect the inflation rate to drop to 2% in January. Thus, the council will lower the policy rate by another 25bp.

This week, the MPC is to hold a meeting. We expect the council to deliver another 25bp cut. Despite Belka’s announcement that the easing cycle was coming to an end, the latest MPC members’ statements clearly indicate that the round of easing will not be paused. The continuation of monetary easing is broadly expected by the market; thus, the statement and the press conference after the MPC meeting will be crucial to follow. Although we expect the council to leave the way to further cuts open, delivering them will most probably be conditional on further weak economic data and the new inflation projection (to be released in a month).

The market is currently pricing in as deep cuts as 75bp more. Although we remain skeptical that monetary easing will end up with a policy rate as low as 3%, we expect the policy rate to be at the level of 3.50%. The MPC council is rather hawkish and cautious on delivering more cuts and further moves will depend on the pace of the disinflationary path. In our opinion, the strongest trigger could be headline inflation dropping below the lower bound of the inflationary target. Otherwise, apart from disappointing monthly releases for industrial output and retail sales, the annual GDP figure of 2.0% did not surprise the market. If the inflation projection confirms the recovery in 2H13, even a slow one, it may restrain the MPC council from further easing, unless, as mentioned above, the inflation rate drops well below 1.5%.

Our baseline scenario assumes that the zloty will remain relatively weak at around 4.16 EURPLN over the course of the next few months. On one hand, domestic factors such as economic growth reaching the bottom in 1Q13 and expectations on monetary easing continuing would prevent the zloty from any substantial appreciation over the course of the next few months. We expect steady appreciation in 2H13, when the growth prospects should start to improve. On the other hand, the successful discussion about Poland joining the Eurozone will result in an appreciating trend in the long-term perspective, as we have already observed positive market reactions to Prime Minister Tusk’s announcement that the debate on joining the EMU will start in two weeks (the EURPLN went up from 4.21 to 4.15).