International Trading
Czech Republic
The current account is heading for a worse figure this year
Hungary
Introduction of new taxes on energy, telecoms and retail companies brings mixed reaction
Poland
The September inflation surprised strongly on the upside
The Week Ahead
Polish industrial output and Czech bond auction might grab some attention
Overview
Markets start to bet on hikes in the Czech R. and Poland
The market expectations of a possible hike in the official interest rates in the Czech Republic and Poland are slowly increasing. The rise in Polish and Czech FRA rates is related not only to a possible contagion from the euro market, where short-term interest rates are obviously rising. However, domestic factors are also fuelling concerns that the relevant central banks will need to react to the risk of future inflation sooner or later.
The ammunition for an increase in market expectations in the Czech Republic was primarily supplied by central bankers and the latest inflation figure was largely irrelevant in this respect. Exact the opposite was true for Poland. Its inflation rate for September surprisingly rose by 0.6% m/m and although it was primarily driven by increased food prices, it encouraged the view that a rate hike cycle would be launched soon.
We agree that official rates in the Czech Republic and particularly in Poland will go up in the end (in the middle of 2011 and late 2010 respectively). However, we doubt whether the current pricing of the start of the hiking cycle is correct. At the moment, markets have priced in that the official interest rate may go up by 25 basis points in the Czech Republic and even 50 bps in Poland before the end of the first quarter of 2011. We would consider such a move to be highly aggressive and, beyond any doubt, it would trigger a sharp appreciation of the domestic currency. And having a strong currency is not popular macroeconomic strategy in the age of a global currency wars.
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