Market no longer bets on rate cuts in Poland in 2012

Central European currencies firmed again on Thursday. The Polish zloty extended its winning streak and strengthened against the single currency in a fourth consecutive session. The zloty posted gains in 15 of 19 sessions so far this year and the EUR/PLN cross rate dipped to the strongest level in nearly 5 months.

Apart from the better global sentiment, recent comments of Polish central bankers have supported the currency too. Moreover, according to the NBP Minutes from its January’s meeting some central bankers expected the (yearon- year) inflation to remain above the target for a longer time. As a result, most of the council members “were of the opinion that should the relatively fast domestic growth, elevated inflation and high inflation expectations continue, the increase in NBP interest rates cannot be ruled out”. Such a scenario had clearly been a surprise for markets and resulted in a sharp increase in FRA 9X12 rates which no longer price in a rate cut.

Regarding our estimates, we expect that the rate of inflation could ease in first quarter, but we foresee that prices might grow at a faster pace in the second and the third quarter. On average, we believe that inflation in 2012 might reach 3.8 percent. Taking into account our relatively favorable outlook for the economic growth, we estimate that the MPC could leave interest rates unchanged in 2012.