Afternoon analysis 27.09.2016

Łukasz Hardt, a Monetary Policy Council’s member, claims that a decrease in interest rates wouldn’t be favorable.

Conservative and boring MPC

During today’s conference entitled “Challenges for the economic integration within the EU,” Łukasz Hardt suggested that he is not in favor of a decrease in interest rates because he does not believe it could stimulate investments. He indicated that Poland is unusual when it comes to the used monetary tools within its region. This concerns relatively high interest rates as well (let’s keep in mind that interest rates are negative within the euro zone).

He emphasized that deflation doesn’t have a negative impact on the economy (deflation has been decreasing recently.) This year’s economic growth at the level of 3.2-3.4%, 500+ program and increasing consumption seems to convince Hardt that a decrease in interest rates wouldn’t stimulate investments. This is because the companies don’t postpone them.

He also cited the widely discussed negative aspects of low (or negative) interest rates. As an example, he indicated Poland. A decrease in interest rates wouldn’t be favorable, because it would significantly reduce the percentage margin. This would have a negative impact on the stability of financial system. Even though some of the MPC representatives are in favor of monetary easing in the coming months (if the conditions of Polish economy deteriorate), they are not a majority.

The Polish currency is stable today. It has yet again succeeded in exceeding the 4.30 level. If this trend continues, the zloty may test the 4.28 level. Today, the Polish currency lost the most against the Mexican peso (more than 1.5%), due to the Clinton-Trump presidential debate in the USA.

Tomorrow’s events

Shortly before the opening of the European markets, we will know the consumer sentiment for the German market by the Gfk institute. This index has been systematically increasing since the end of 2008 (from 1.5 in August 2009 to 10.2 in September 2016). The market estimates that it will remain at the level of 10.2.

The German economy only quoted this value in June 2016 and it was its highest value since December 2001. Taking into consideration the positive readings of the Ifo institute’s business sentiment from yesterday, we may expect the consumer sentiment to be positive as well. This would also confirm a positive year’s ending for the German economy.

A three-day International Energy Agency forum in Algiers will end tomorrow. During this summit, Russia and the OPEC countries had an unofficial meeting. Its purpose was to achieve an agreement regarding the reduction (and/or freezing) of oil mining. We may expect many announcements and testimonies from ministers of particular countries. They will definitely impact oil rates. However, as we emphasized in yesterday’s analysis, it seems unlikely that an agreement will be achieved. This is because some countries (Iran, Iraq, Nigeria, Libya) have a large potential to increase mining. Therefore, even freezing the level of mining is not profitable for them.

Oil rates may become even more volatile due to the oil supply data in the USA. It will be published at 16.30 (4.30 PM). Last week, the supplies were unexpectedly reduced by 6.2 billion barrels. Combined with the decisions from the central banks, which wore-off the dollar, this was an impulse for investors to buy oil, as well as an increase in oil’s rate. However, the consensus assumes an increase in oil supply by 2.7 million tomorrow.

This should theoretically be negative for oil prices, because of a larger supply in the market. However, it’s difficult to foresee the final reaction of oil, due to a large fluctuation of its rates, as well as the forum in Algiers.

One week after the Fed’s decision regarding interest rates, Janet Yellen (the Fed’s chairwoman) will testify in front of the Joint Economic Committee in Washington D.C. at 16.00 (4.00 PM). Her testimony will consist of two parts – her statement and questions from the Committee. However, we don’t expect it to be significant for the dollar. This week didn’t bring any significant data. Moreover, the testimony will regard supervision and regulation.

More Fed members will have their testimonies tomorrow. The members will be Charles Evans, James Bullard and Loretta Mester (only Bullard and Mester have the right to vote this year, Evans will have it next year.) Loretta Mester is one of the three Fed members who voted for rate hikes during the meeting on September 21st. Even though her testimony will concern social development, the Q & A session will probably contain inquiries regarding the monetary policy. However, we don’t expect her answers to be crucial (there was no new data since the FOMC meeting). They should rather confirm her views regarding rate hikes in December.

Bullard’s statement also won’t concern the monetary policy, but will concern the banking society. However, investors will also search for suggestions regarding rate hikes in his statements. Bullard is the most dovish among the FOMC members who have the right to vote, and he sees only one hike until the end of 2019, regardless of when.