Afternoon analysis 22.09.2014

The G20 countries warned about record-low interest rates posing risk to the financial markets. The zloty waists for last data before the MPC decides on rates.

The G20 officials expressed anxiety that the record-low interest rates may pose risk to the economy and financial markets. In addition, the communique pointed on exceptionally low volatility in the assets prices, what may be the signal of future distress in the markets, according to some commentators.

Germany was likely the main adherent of this part of the statement. The Bundesbank President Jens Weidmann has had negative view on the ECB's accommodative stance since the beginning of the crisis. In addition, the German central bank chief didn't support the September actions undertaken by the ECB (cutting interest rates at record-low and launching assets purchases in October).

The statement after the G20 meeting stressed the need of prudent communication of the central banks' decisions. In the mid 2013 the then Fed president Ben Bernanke unexpectedly announced that the US central bank would curtail the QE. His statement spurred the sell-off of assets from emerging markets, what put countries like India and Brazil in the face of financial crisis. Eventually, the worst case scenario was avoided, but it was the period of heightened volatility.

Currently, the Fed led by chair Janet Yellen is going to increase interest rates for the first time since 2006 after closing quantitative easing in October. Dropping the accommodative policy by world's major central bank needs the prudence to avoid mistakes in communication with financial markets, what could cause damage to susceptible countries and their financial markets.

The Fed statement in the last week said that interest rates will rise in 2015. Similarly, the Bank of England is going to increase the cost of credit in the next year after the fail of independence referendum let the BOE to focus on the economy. In turn, the European Central Bank and the Bank of Japan will continue to move in opposite direction due to weakness of their economies and increased risk of deflation. In addition, the People's Bank of China and the Reserve Bank of Australia will pursue an accommodative monetary policy due to under-performance of their economies.

The G20 communique pressed countries to focus on the economic growth. The need of fighting high unemployment rate was stressed. The euro zone was pointed as the economy that needs to be strengthened. However, the way of achieving these goals have to be tailored to particular countries.

The zloty awaits data

Tomorrow the Central Statistical Office will publish last report concerning August before the Monetary Policy Council decides on interest rates on 8 October. Jerzy Osiatyński cited by PAP said that he would like to see 50 basis point cut in the next meeting. In turn, Jerzy Hausner said that there is no need for easing the monetary policy but rather for its adjustment. So he will propose 25 basis point cut, according to PAP. All in all, the interest rates cut has been prejudged for a few weeks. The only question is about the scale of cuts. Nevertheless, cuts stronger than 25 basis points may occur, if tomorrow's reports are very negative, but the probability of that scenario is very low.

Today the zloty is slightly higher against its major pairs. In the longer term the zloty will move in narrow rage against the euro and the dollar is poised to appreciate.