The Polish zloty held a tight range throughout Tuesday morning as the market braced itself for the all important rate decision later in the session. The EUR/PLN pair eventually ended the day slightly in the red after the unit was hit by a small technical correction as US players kicked in around noon.
The MPC decided to cut interest rates by 25 bps for the second time this year after what we think has been an intense discussion. The rate decision was not nearly as much of surprise as the length of the MPC meeting itself. Until yesterday rate decisions were always announced before 14:30 CET. This time however the preliminary NBP statement was released after 16:00. The press conference, which usually takes place before the end of trade, was postponed until after the closing. This clearly suggests that there was a stormy debate within the MPC. Later, the behavior of central bank governor Leszek Balcerowicz also confirmed that there is a profound split between the dovish and hawkish fraction within the MPC.
The governor obviously was not happy with the rate cut, which was undoubtedly against his personal view. Just before the end of trade the zloty managed to claw back some of the morning losses and returned to the 3.78 EUR/PLN range, but the rebound probably was due to the weakening greenback rather than caused by renewed appetite for Polish bonds. As for t oday’s trading, despite the reduced interest rate carry between Polish and European rates, we expect the zloty still to get enough support from bond flows to enable it hold to current ranges.
(CSOB - Investment research)