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Polish inflation near 10-year high

Polish inflation near 10-year high

16.06.2011 10:44

Czechs face a general strike
The Czech Republic faces a general strike as unions do not agree with the planned tightening of fiscal policy. The restrictive measures (e.g. VAT rate hike or extension of the retirement age) are part of a pension reform. In contrast to Greece, we expect the strike should be peaceful and should have limited impact both on the economy and domestic markets.
Actually, Greece and fears surrounding the euro zone periphery finally hit Czech markets, because the koruna weakened and risk premium on the Czech bond market (represented by widening of the ASW spread) increased. Thus, further situation on Czech markets will very much depend on developments in the euro zone. Nevertheless, unless it is clear that the debt crisis has a negative impact on the German economy, the Czech economy should be fine and the impact on the local markets will be limited and temporary.


Global risk aversion finally reached the Hungarian forint and the currency weakened another 1% to EUR/HUF 268.00 this morning from 265.50 yesterday afternoon. Highyielding currencies are suffering around the world, thus the forint could remain under pressure.
Bonds have been following the currency and the 5y5y forward swap spread widened to 301bps, a level not seen since February. Widening long-term forward spreads suggest that the market is vulnerable towards weakening. Bonds however were well supported yesterday after inflation data was better than expected and yields shifted down about 15bps across the curve.

The Polish CPI surprised both us and the market. The inflation rate jumped to the highest level in nearly 10 years and reached 5% y/y. This was mainly due to an ongoing rise in food prices, which have significant weight in Polish consumer basket. Unfortunately especially food and fuel prices have significant impact on inflation expectations, on which the MPC is pretty sensitive. That is why we are somewhat afraid of further front-loading of interest rate hikes in light of last inflation figure. The central bank governor Belka tried to calm down the bets on further hikes saying “the MPC will certainly not panic now” and he was supported by his colleague Elizabetha Chojna Duch. Nevertheless both central bankers are doves and recently it seemed to us that hawks were gaining power on the board. That is why we need to see some other bankers speak. For now we stick to the view that next hike should com after the summer in September.

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