The markets have finally reacted to domestic figures as expectations for short-term rates (FRA) and the koruna fell after surprisingly lower-than-expected June’s inflation figures released already on Tuesday. As we already mentioned low inflation readings imply that probability of an immediate rate hike form CNB is very low now, which means that the short-end of the curve might stay at very low levels and the koruna might not get any interest- rate support soon.
Moreover, in the case of the koruna we are afraid that the zloty could stay weak in coming days, because of negative spill over effects from the euro zone periphery.
Hungary - Forint stabilises after new lows
The Hungarian forint set a new 1-month low of 270.25/€ yesterday at noon after news from the European banking stress test increased risk aversion again.
The currency later recovered to 267.00 and settled down at 269.00.
The central bank released a warning signal that the 2012 budget needs about 2% of GDP tightening measures in order to achieve the budget deficit target of 2.5% of GDP. It also stated that current plans, like the Szell Kalman Plan or the Convergence Program may significantly lower this amount. The government will submit the budget proposal to the Parliament in mid-September and that may be a key element in this debate.
Polish inflation was much lower due to German E.coli outbreak
The Fed’s dovish signal and subsequent weakness in US dollar helped the zloty to trim some of the recent losses. Nevertheless the pair stayed above 4.00 EUR/PLN as the Swiss franc (key currency for fx denominated loans of Polish households) continued to gain towards euro and as inflation came much lower than expected trimming hopes on further interest rate hikes.
Polish inflation came out at 4.2% y/y in June, much lower than both our and consensus 4.8% view. The outcome was similar to earlier released figures in the Czech Republic, Hungary and Romania, where an E.coli outbreak in Germany pushed down prices of vegetables.
Although it is a one-off effect that should vanish in the upcoming months, it supports our base scenario, which considers a break in interest rate hikes till late autumn. Well known dove Elzbieta Chojna Duch said the inflation reading proved the council was right to pause last month. On the other hand rather hawkish Anna Zielinska-Glebocka said that the June drop in CPI could be on-off and should not have impact on the monetary policy.