Tumbling equity markets pushed CEE currencies to new lows yesterday. The forint peaked at 295/€, the zloty at 4.51/€, while the Czech koruna was more stable at 24.80. It seems that risk of recession on core markets is a major concern for investors and risk reduction is taking place regardless of the economic outlook. Polish central bank governor said that the zloty exchange rate is moving away from the healthy fundamentals of Poland’s economy’, while Hungary’s deputy central bank governor Julia Kiraly said that high uncertainty about the impact of the early repayment scheme warrants a wait-and-see approach. In Romania, the central bank was seen intervening on the market and sell euro of about 20 million.
The CNB turned to more dovish stance yesterday. Two traditional hawks (Zamrazilova, Janacek) joined the rest of the board and voted in favor of interest rate stability. Although the Central bank confirmed that implied interest rate path counts with hike at the end of 2012, but the risks tilts towards lower inflation and interest rates. Inflation should rise at the beginning of the year, but mainly due to one off effect increase in VAT. We consider current forecast of CNB to be overly optimistic. Putting it together with mounting external risks, we believe in longerterm period of interest rate stability. The rates should stay at rock-bottom at least till mid-2012. Interestingly the Bank sees the current level of the koruna as clearly pro-inflationary.