Afternoon analysis 08.10.2014

The Polish Monetary Policy Council cut interest rates more than expected. Correction trends remained valid in the markets.

The Monetary Policy Council cut interest rates by 50 basis points – more than expected 25 points. It also lowered lombard rate by 100 points, aiming at bolstering growth and ward off deflation risk. It was first cut in the last 15 months.

After announcement of the decision the zloty was little changed. It was somewhat surprising due to the scale of cuts. Decision sparked speculations that the MPC may be willing to only adjust monetary policy rather than easing a stance of the central bank.

Subtle difference in names would have had far-reaching implications. It would have meant that cut in October was only one off action and there will be no additional cuts. During the discussion before October meeting was saying that there is no need to for more accommodative monetary policy, but the MPC should only adjust its stance to lower pace of growth and exceptionally low inflation.

Given the quite good performance of the labor market (unemployment rate fell to 11.5 percent, according to government forecast), easign of the Ukrainian crisis and more accommodative stance of the European Central Bank, the MPC would have asses that the economy needs only the adjustment of rate level. Conversely, other reports – GDP data, industrial production, retail sales and employment numbers – pointed on slowing growth. These reports supported the case for easing the stance of the central bank.

The statement after the meeting pointed at the second approach, what means that the probability of more cuts is slightly higher than ending cuts after this meeting. The monetary authorities pointed at low energy prices and what increases a pressure on prices. In addition, inflation expectations of households and companies are at low levels. So the MPC sees risk for its inflation goal and don't exclude possibility of additional cuts.

At a press conference president Marek Belka said was not unanimous, but he refused giving some hints whether some MPC members voted for higher cuts. Belka stressed that the MPC is willing to provide cuts without unnecessary extending the period of cycle. That could mean additional cuts in November or ending cuts after this meeting, although it is less possible.

The German lingering

Rising problems of German economy bolstered worries that global economy is loosing steam. That pushed stock indices lower in the world markets. But it didn't influence the zloty.

To sum up, the Polish currency is stable after the unexpected cuts and Belka's press conference. It may suggest that the base scenario for the zloty remained valid. So after the current correction in the markets ended, it will continue to stabilize against the euro and the frank and drop against the dollar.