The Czech central bank held a monetary meeting on Thursday. As expected, interest rates were kept on hold. Stable rates were supported by all Board members except one who voted for a cut. New GDP projection is significantly worse for next year. The CNB says the projection is consistent with a slight decrease in market interest rates at the beginning; then the rates should stay flat. However, the decision about rates has also reflected the risk that the Eurozone may nearly stagnate in 2012, which would weigh on the koruna and, thus, bring an upward risk for inflation. Risks are mounting on both sides and Governor Singer yet again repeated that the rates may go either way. The CNB statement was more dovish than previously but this was not surprising; impact on the koruna was minimal.
The ECB meeting was the first one with new President Mario Draghi. Interest rates were decreased by 25 bps, a month earlier than expected. But given the economic downturn and the latest turmoil in the Eurozone, lower rates were welcome and gave the financial markets a boost. The decision was unanimous and reflected the worsening macro data. President Draghi stressed risks for GDP growth. He warned of a potential recession at the end of the year and said that projection for next year´s growth will likely be lowered considerably. Bond purchases are temporary and the amount available is limited, the ECB repeated. While the rate cut was positive for markets, the following statement holds back optimism because of growth outlook and the reserved stance to the bond purchases.
Interest rates in the US stay stable and the Fed pledges to keep them on hold till mid-2013. Projections for both economic growth and unemployment were revised downward. No clear indication about extending the bond purchases has come in. But the Fed leaves the door open for more stimuli in the future. The meeting did not have a big impact on the markets.
Quite a lot of important macro figures were released during the week. The European numbers were not very convincing as we have seen a downward revision of the PMIs and a fall in German factory orders. The US data were mixed. The ISM indices came out worse than expected, while labor data were quite good. Overall, the latest US figures are not bad; they suggest that recession can be avoided. The influence on riskier assets was slightly positive.
Nevertheless, the most influential topic was Greece. After the EU Summit we believed this week to be somewhat calmer, but Greeks added fuel to the fire again. Prime Minister Papandreou shocked everyone by announcing a referendum about the European rescue plan. A rejection would mean a disorderly bankruptcy for the country, probably a 100pct bond haircut for banks and a heavy pressure on Italy´s bond yields. It would actually spoil the Eurozone effort to contain the crisis. Markets turned sharply negative. Immediately, the Eurozone leaders urged Greeks to scrap the referendum plan. In the end, they did. But in the meantime, a lot of news came in about the referendum and a potential Greek PM´s resignation, bringing much confusion to the markets.
Although the referendum may finally be only a short-lived issue, deeper problems persist. In our opinion Greece will be still over-indebted even after the proposed debt write-off. Moreover, the plan for EFSF boost still lacks important details and does not have ensured more capital sources. The euro and the CE currencies have pared their gains on waning optimism about the debt crisis. During the week, the koruna was even traded well above 25.00, then it returned slightly below that mark. We have some interesting data in the Czech calendar for next week. They should confirm the economic slowdown and no inflationary pressures. No big impact on the FX market is expected. The Eurozone debt crisis still raises new questions - they will likely be the most important market catalysts.