Afternoon analysis 23.09.2014

The NBP among few EM central bank to cut interest rates. The unemployment drop to lower odds for deeper cuts by the MPC. Bombings in Syria increased risk aversion despite easing of the Ukrainian crisis.

Economists at Bank of America Merill Lynch put the National Bank of Poland among few emerging markets' central banks to cut interest rates in the near future. Only four of the 16 central banks tracked by BoA ML will lower the cost of credit, despite the Fed's decision to drop accommodative monetary policy and rise interest rates in 2015 for the first time since 2006.

The Federal Reserve decision to shift from unconventional monetary policy to traditional rates driven approach means, that due to increase of market interest rates in the US the capital will leave emerging markets. The International Monetary Fund reported that the amount of portfolio investments in EM countries fell to 9 billion dollars in August, down form the three-month average of 38 billion. The trend will be strengthen due to more hawkish stance of the Fed in the near future.

Middle East to replace Ukraine?

The United States launched bombing of Islamic State positions in Syria. Washington was supported by some European countries and Arab countries. In addition, the uncertainty in the region was heightened after Israel inform on shooting the Syrian airplane that encroached its territory. The escalation of tensions in the Middle East provoked risk aversion in the markets, what supported the yen and the frank (safe haven currencies).

The turmoil in the Middle East coincides with easing of the Ukrainian crisis. Moscow and Kiev are interested in ending of the crisis due to high economic and political costs of fighting, what has been reflected in fulfilling of the Minsk agreement. So we can expect that in the near future the Ukrainian crisis will be put aside. That is good information for risky assets (including the zloty), but it will be probably balanced by the Middle East developments.

Only 25 basis points cut

The Monetary Policy Council said that it will cut interest rates in October, if the economic data shows further slowdown in the growth. In addition, the European Central Bank introduced unprecedented measures (negative interest rates and assets purchases) to spur growth and inflation, what may pose the risk for the Polish exports due to adverse rates disparity.

The only unknown was an amount of cuts. First, the market consensus was that the MPC will cut rates by 25 basis points. But after poor industrial production report (it fell 1.9 percent) and comments from dovish MPC members, investors speculated that the cut may be 50 basis points. Eventually, today's data ended speculation – the unemployment rate fell to 11.7 percent – the lowest level for three years. In addition, retail sales figures were above expectations. And it is clear now, that the MPC will cut rates no more than 25 bp.

The zloty rose against its major pair as today's data ended speculation that the MPC may cut rates by 50 basis points. The notion that monetary policy in Poland needs to be adjusted rather that eased was supported by data, and it will be decisive in October.