The March CPI
report, which was by far the most relevant event of the day on Friday (and probably the second most important feature of the month apart from the MPC meeting next week) brought a moderately unpleasant surprise. The CPI
hit the central bank target of 2.5% y/y, to the surprise of the majority of analysts (including us) who had expected inflation at a level of 2.4% y/y. CPI
increased by 0.5% m/m which, on the one hand, was a result of a slightly higher increase in food and fuel prices than expected and, on the other (particularly importantly), higher core inflation. The data indicate that the rise hotel and restaurant service, as well as health related service prices translated into an increase in net inflation to 1.7% y/y.
Of course the numbers give no support to the MPC doves, but we believe that in the context of next week’s MPC meeting Friday’s data will almost certainly be neutral – firstly, because the Council normally distances itself from single month data and secondly, because the actual outcome did not really differ that much from expectations. Nevertheless we can do nothing else than uphold our base scenario, in which we assume that the inflation projection, although being more optimistic in January with regard to 2007 and (to a lesser extent) in 2008, will show that the NBP objective will be permanently exceeded in 5 - 7 quarters. In this situation, we assume that the moderate Council members will move (for a short while) to the hawk camp and will vote for a pre-emptive interest rate hike next week and that they will ultimately mange to convince NBP president Skrzypek over to their way of thinking. Furthermore, if this fails, one of the moderate doves , e.g. Mirosław Pietrewicz, could vote for the (effectively cosmetic) hike, which would ultimately topple the balance in favour of the hawk.