NBP set to start easing cycle

The easing cycle in Central Europe could continue this week and financial markets are now looking to Warsaw. The Czech National Bank set its rates at the technical zero last Thursday, verbally guaranteed a prolonged period of super-low rates, and decided to put an end to its conversions of forex reserves yields into CZK. Also the National Bank of Hungary cut its base rate - for the third time in a row - by 25 basis points, to 6.25%. The real base rate of the NBH thereby slipped into negative territory after a longer time, as the current inflation rate is 6.6%. The monetary policy council of the NBP is going to hold its rate setting meeting this week. The latest series of macroeconomic data, including a fairly rapid decline of inflation expectations and poorer retail figures, should encourage doves in the Monetary Policy Council. While the sentiment in Polish industry (PMI) has improved slightly, the key production sub-index remains far below 50 points. This is why we expect that the NBP will cut rates by 25 bps, triggering a monetary easing cycle, which could be fairly short though by Central European standards. The Polish year-on-year inflation might fall close to 3% by the end of this year. The new inflation forecast of the NBP should reflect the above mentioned trends and make the National Bank of Poland (NBP) act; our opinion is that the rates are likely to be cut twice (with the second cut to be delivered in January 2013).
The PM Petr Necas was re-elected ODS chairman with a 60% majority over the weekend. However, the party congress did not offer any answer to the question of whether or how the tax package or state budget would be passed soon in the Parliament.