Afternoon analysis 12.11.2014

, author:

Piotr Lonczak

The pound plunged as the Bank of England cut forecast for GDP and inflation growth. The zloty was stable despite lower projections from the National Bank of Poland. Russian banks seek euro and dollar liquidity and willing to pay high interest.

The pound posted severe losses as the Bank of England cut forecast for GDP and inflation growth due to the sluggishness of the euro zone economy.

GDP is expected to rise 2.9 percent in 2015 and it will backpedal to 2.6 percent in the next year. It is less than 3.1 percent and 2.8 percent estimated earlier, respectively. The inflation outlook was also cut – price are to grow by 1.2 percent in 2014 and 1.4 percent in 2015, lower than 1.9 percent and 1.7 percent in the previous estimate, respectively. The forecast for 2016 was kept at 1.8 percent.

Growing concerns that the euro zone economy may slip into a next recession persuaded the BoE to lower its estimates for exports. It is expected to drop 1 percent in 2014 against growth of 2.25 percent estimated earlier. In the next year it is going to rise 4 percent, less than 5.25 percent expected previously.

The outlook of the pound is gloomy due to the BOE's view on inflation that will probably fell below one percent in within six months. Moreover, the price growth will return to the BoE's target of 2 percent in three years.

According to the BoE projections a price pressure on the labor market will remain subdued. However, this view does not correspond to the data released today, that showed wage rose 1 percent – more than economist's forecast of 0.8 percent.

Lately, the UK economy was showing some deceleration. This presumption was confirmed by the official projections from the Bank of England. Given that, the expected rise in interest rates shifts in a more distant future. Investors bet first hikes by the end of 2015.

Thus, the BoE will be outstripped by the Federal Reserve. That puts the dollar in a more favorable position against the pound. That was reflected by today's plunge of the GBP/USD at its lowest level since September 2013.

The zloty remained stable

Despite the release of the National Bank of Poland's Report on Inflation the zloty remained stable. The report was a somewhat dovish by revealing a more negative outlook for the Polish economy. The GDP will grow 3.2 percent in 2014 and it will slow to 3 percent in the next year. It is lower than 3.6 percent previously estimated.

Although the newest forecasts gave additional arguments for a dovish part of the Monetary Policy Council, there was no cut in November despite the fact that the MPC had access to the NBP's report. Given current circumstances the odds for interest rates cuts in the near future are very low. This factor should result in stabilizing and maybe some strengthening of the zloty.

The Central Statistical Office said exports rose 4.6 percent from the previous year and imports rose 4.7 percent in the January-September period. Trade deficit was 975.9 million euro against 767.5 million euro in the corresponding period of the previous year. The release didn't affect the zloty.

Important factor for the Polish market is the Ukrainian crisis and its consequences. Bloomberg informed that the Russian banks are seeking a dollar and euro liquidity as they have scarce resources to meet their clients' needs and pay their debt. As a result, creditors offer a very high interest of 6-7 percent on dollar deposits.

It is the result of Western sanctions imposed on Russia over Ukraine. The Russian banks are barred from financial markets in transactions with a maturity longer than 30 days. Creditor's determination in luring the dollar liquidity proves that the situation is very tense.

Today the zloty is steady due to stable EUR/USD. On Friday the CSO will show the GPD readings in the third quarter. The growth is expected to slow to 2.8 percent from 3.3 percent previously. The report will facilitate the assessment of correctness of the MPC and NBP view on the economy. Thus, it will help to better predict the zloty developments. Until the report is released, the zloty will probably stabilize at current low level.

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Sp. z o.o is prohibited.

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