Daily analysis 18.10.2016

The British data caused minor changes on the pound. The American base case inflation is in the center of attention. The zloty is working-off a portion of its losses, but it remains weak. Osiatyński of the MPC is worried that salaries may grow too fast.

Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.

• 14.30: Consumer inflation from the USA (estimations: 1.5% y/y; excluding fuel and food 2.3%).

Is higher inflation positive for pound?

Today’s publication regarding the British consumer inflation for September was slightly higher than expected. This goes for the general reading (1.0% y/y vs 0.9% y/y), as well as for its base case component (1.5% y/y vs 1.4% y/y). It’s worth noting that food in the United Kingdom is still cheaper than it was last year (negative 2.3% y/y). However, it seemed that deflation of this component would rapidly flatten due to a weaker pound.

The pound’s depreciation is more visible in clothes category. Last month, this category was decreasing at a pace of 1.2% y/y. Currently, it’s increasing by 1.0% y/y. A rapid CPI growth is observed in education (5.9% y/y) and restaurant (2.9% y/y). However, some time must pass until Brits will really feel higher prices on their own skin.

A lower evaluation of the pound, as well as an increase in raw material prices, is very well reflected in production factors prices. Their increase was at the level of 7.2% y/y, which will probably translate to production costs and later on to consumer prices. However, it remains unknown how will the Bank of England react on a possible up-revision of inflation in November’s macroeconomic forecasts. Moreover, it’s uncertain would higher prices be favorable for the pound.

Theoretically, a high inflation pressure should force the BoE to raise interest rates, or at least exclude monetary easing. However, Mark Carney recently said that he is able to tolerate a slightly higher inflation. This may mean that the monetary policy would remain mild for a long time.

High inflation and low interest rates may discourage the foreign capital from finance the current account deficit, as well as from buying treasury bonds. This would result from an increase in pressure on bond prices. Moreover, a highly volatile currency would make such an investment more hazardous. As a result, high inflation may become an argument to increase sale of the pound in the future.

American inflation

The American inflation data will be today’s main event. Economists who were surveyed by Bloomberg, assumed that the base case CPI component will grow by 2.3% y/y. If the reading is near the consensus, or even is slightly lower, it shouldn’t cause large changes on the dollar.

However, if it appears that the growth of base case inflation went above the level of 2.3% y/y in September, it would be its highest reading since the end of 2008. Of course, it’s worth keeping in mind that the FOMC focuses more on the PCE inflation in its prognoses. However, not only would a larger increase in the CPI (excluding fuel and food) be a good argument for rate hikes in December, but it would also confirm the argument of some FOMC members regarding a more rapid path of monetary tightening. Moreover, this would also be a good argument to strengthen the USD.

Zloty remains weak

The Polish currency remains relatively weak. However, it managed to work-off a portion of its losses against the euro, as well as against the forint. It’s worth focusing on Bloomberg’s interview with professor Osiatyński. The MPC member took note of a risk that inflation may increase, due to a higher level of salaries. He said that, “if the government will not limit the salaries growth by compromising with other social partners, higher labor costs will translate to prices and cause inflation to grow.”

Osiatyński also suggested that a higher inflation could result in necessity of rate hikes. Taking into consideration a low investment level, this wouldn’t be a positive solution for the economy. It seems that Osiatyński’s views are not shared by many of the MPC members for the time being. Therefore, they shouldn’t increase rate hikes expectations and would rather not become a clear signal for zloty’s appreciation. The EUR/PLN should remain above the 4.30 level in the forthcoming hours. Only a relatively dovish ECB meeting on Thursday may take the euro below this level.