Afternoon analysis 12.05.2016

The Federal Reserve may delay interest rate hikes until September. The US labor market missed the forecast. The zloty stabilized at the low level before the decision of Moody's.

About one third of the 90 economists surveyed by Reuters, cited June as an appropriate moment for the next hike. However, the majority pointed at September as the most probable month for a hike. As a result, the Federal Reserve may wait for nine months before deciding to raise rates again after last year's increase in December.

Before deciding to raise rates again, the Fed wants to be more certain that the inflation rate will move to the two percent target in the mid-term. The belief that the inflation rate may accelerate has been recently undermined by the US reports. The majority of the readings were below the forecast. The GDP report showed the slowest pace of growth in two years.

In addition, the data on the labor market developments missed the expectations. Until then, the reports on the employment situation have been rather solid. The data on employment situation showed a 160k increase in jobs against the 200k forecast. Moreover, today's report on unemployment claims missed the forecast. The number of claims increased to 294k against the 277k that was projected. It was the weakest level in a year. The situation is negative for the dollar.

The zloty at low level before Moody's

The CSO released reports on inflation. The reading was in line with the forecast. Deflation stood at 1.1 percent against 0.9 percent in the prior month. April's report was below the forecast.

Today's data will not push the MPC to adjust its stance. Although the price growth remains very distant from the 2.5 percent goal, the monetary authorities do not see that the situation has a negative impact on the economic developments. A similar stance was showed by the MPC at its last meeting.

Still, the situation may change if the economic reports continue to disappoint. The March reports on industrial production and retail sales were below expectations. Only the labor market reports were solid. On Friday, the CSO will release the GDP report from the first quarter of 2016. The forecast is for a 3.4 percent growth against 4.3 percent in the prior quarter. If the economy continues to slow down in the coming months, a discussion on possible cuts may be resumed.

An important factor that the MPC is taking into account when deciding on rates, is the general stability of financial sector. In this context, the decision of Moody's on the Polish rating may be significant. If the grade is lowered, the Polish bonds and the zloty may be less attractive for foreign investors. As a result, the probability of rate cuts will decline. A similar scenario may be expected when Moody's lowers the rating's outlook.

Taking into account the major factors influencing the zloty's developments, one can expect the currency to stabilize at the low level. Given the uncertainty stemming from the decision of Moody's, the zloty may be volatile in the near future.