Poland: NBP on hold, but slightly more hawkish

The Polish central bank’s (NBP) Monetary Policy Council (RPP) today decided in favour of unchanged interest rates, keeping the key policy rate at 4.00% - a decision completely in line with our and the market’s expectations. It should be noted that the RPP took somewhat longer than normal to announce its rate decision today. This could be a sign of more serious differences of opinion within the RPP. But, on the other hand, these differences are already well known and in our view one should be careful about reading too much into the delay in today’s announcement.

At the press conference after the decision the RPP struck a slightly hawkish tone, but there was no major change in the rhetoric - even though the central bank revised its inflation forecast for the rest of 2006 and 2007 moderately up. In the new forecast is for inflation at 1.8-2.2% by year-end and at 2.9-3.8% by the end of 2007 (both with a 50% probability). This was more or less in line with what could be expected. It should be noted that the inflation forecast is the NBP research department’s forecast and not the forecast of the RPP. However, that being said the inflation forecast is a reminder that inflation should move further into the inflation target range of 2½% +/- 1 percentage point within the coming months - and even above the target range during 2007. This obviously supports the market’s - and our - view that interest rates will be hiked during 2007. But, this is no big surprise and hence should not have any significant impact on the Polish markets.

We expect the NBP to step up the hawkish rhetoric further in the coming months. The central bank is likely to continue to stress the risk of higher inflation from increased wage pressures. Furthermore, we would expect the NBP to increase the warnings that the Polish real estate market might be overheating - something that the NBP has until now not commented much on. For further clues on the timing of the rate hike we would especially keep an eye on the two key swing votes on the RPP - Wojtyna and Sławinski. Especially Sławinski turning more hawkish would, in our opinion, signal that the NBP was getting ready to hike. Note, however, that Sławinski has not been particularly hawkish of late. The NBP will also publish new inflation projections today: inflation at 2% by year-end and moving above 2½% during Q1 2007 looks like a good bet.

At the moment, the Polish markets are more likely to move on global events - especially expectations on US monetary policy and general global risk appetite - but we would continue to stress our worries about the domestic political situation and indeed the political situation in the rest of CEE.

Danske Bank A/S

http://www.danskebank.com/

Source:By Lars Christensen, fxstreet.com