Afternoon analysis 23.03.2016

The Bundesbank President suggests more patience in pursuing the fulfillment of the inflation goal. The unemployment rate did not surprise. The zloty was steady.

The latest comments from the Fed members have been more hawkish than one would have expected just after the FOMC meeting. Charles Evans, the Chicago Fed President, said tow hikes would be appropriate. It was quite a surprising statement, as he is considered a rather a dovish policymaker.

Earlier, the other Fed members also support the tightening scenario. As a result, the dollar has gained recently. However, just after the Fed's March meeting the US currency dropped against the euro and other major pairs. In the March forecast, the central bank said it will raise rates two times against four hikes expected in the December projection.

Moreover, James Bullard, St. Louis Fed President, said the risk of the Fed falling behind the curve, has increased. He also added that he has been considering whether to drop the interest rate forecast (the dot plot) as it spurs volatility in the markets.

The expectations for more hikes have been reflected in the financial markets. The probability of the next increase of interest rates has exceeded the 50 percent threshold in July. It is a considerable change, as a few weeks ago the market expectations were only for one hike at the end of the year.

Weidmann suggests patience

At the March meeting, the Fed said that their stance will be rather dovish, but currently the US central bank officials are quite hawkish. In contrast, the ECB has signaled the dovish stance and his representatives stress the readiness to do more.

Only the Bundesbank President presents an opposite stance. The German Central Bank Chief Jens Weidmann said the ECB should be more flexible of the time required for inflation to return to the goal (according to Reuters). The Frankfurt-based institution should worry that the banking sector profits are low as this negatively affects the transmission mechanism of the monetary policy.

In addition, Jens Weidmann said he sees no risk of sustained deflation and that the drop in core inflation (the measure that excludes volatile prices of food and energy) was transitory. The Bundesbank President warned that record low interest rates may result in asset bubbles and limit the governments' willingness to introduce structural reforms.

Stable zloty

Today's data on the unemployment rate was in line with the forecast. It stood at 10.3 percent in February - no change from the previous month. The data confirmed an ongoing expansion in the labor market. Other reports from the Polish economy have exceeded the forecast and strengthened the notion that the economic expansion is sustained.

The unexpected decision of the Hungarian Central Bank to cut rates, put the zloty in quite a good position. After few months of weakness (since October 2015) the zloty is now relatively stronger than the forint. Moreover, the MPC stance is rather a hawkish. As a result, the current probability of interest rate cuts is rather low. Given the situation, the basis scenario for the zloty is to stabilize with a tendency to appreciate.