Emerging Policy-Hawkish Poland to join the doves

November 6, 2012

All eyes on Poland’s central bank this week to see if it will finally join the monetary easing trend underway in emerging markets. Chances are it will, with analysts polled by  Reuters unanimous in predicting a 25 basis point rate cut when the central bank meets on Wednesday. Data has been weak of late and signs are Poland will struggle even to achieve 2 percent GDP growth in 2013.

How far Polish rates will fall during this cycle is another matter altogether. Markets are betting on 100 basis points over the next 6 months but central bank board members will probably be cautious. Inflation is one reason  along with the  the danger of excessive zloty weakness that could hit holders of foreign currency mortgages. One source close the bank tells Reuters that 75 or even 50 bps would be appropriate, while another said:

“The council is very cautious and current market expectations for rate cuts are premature and excessive.”

That would appear logical for a central bank whose mindset is essentially hawkish and which raised interest rates just six months ago to combat inflation. Goldman Sachs said in a note that it reckons any cut will be reluctantly made:

Opposition to more aggressive easing will likely remain strong owing to still high inflation and near-term risks relating to higher food and energy prices, and the large weight attached to the inflation objective.

Another EM hawk is Russia which could follow up on its shock September rate rise with another 25 bps hike, either this Friday or in December, as it tries to demonstrate its newly-forged, inflation-fighting credentials. Inflation is expected to top 7 percent by year-end and should stay above the 5-6 percent target even in 2013, analysts predict.

A rate hike and the promise to tame inflation will not disappoint bond investors who look forward to piling into Russia’s OFZ domestic bond market which is set for liberalisation in coming months. Goldman points out the Russian debt curve has flattened quite a bit in recent weeks on these two factors but a hike this month could see further gains on longer-dated debt.

Elsewhere, central banking hawks are rather thin on the ground.  South Korea for instance has cut rates twice in the past four months, with the first cut coming as a surprise to investors. It will certainly do so again but is expected to stay on hold this week. Growth is robust in Peru, Malaysia and Indonesia and these central banks are also unlikely to cut interest rates this week.  But as central banks across the world have shown in recent weeks, the potential for policy easing surprises remains extremely high.

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