Everything according to plan
The deviation from historical parity achieved a peak of 11.4 percent last week. This growth was mainly caused by the IPO of PKO BP. The interest of foreign investors was spectacular, which naturally resulted in a meaningful rally of PKO BP's price, followed by huge turnover. However, later on the situation calmed down and the Polish currency lost some of its previous gains. The slight correction should be considered as nothing extraordinary. The week closed at 11 percent over the historical parity, which means a distinctly higher level than the week before.
What's next then?
The coming week sees the Monetary Policy Council (MPC) monthly meeting. Investors wonder if the MPC will raise interest rates. The latest inflation projection issued by the Polish Central Bank was soft in comparison to previous predictions. It still highlights an inflation increase in the first quarter of 2005, however, this shouldn't be as rapid as previously assumed. After the first quarter of 2005 inflation should drop due to statistical reasons, however a 2.5 percent yoy figure (the inflation target) in December 2005, seems rather unlikely.
So are we threatened by further interest rate increases? Members of the MPC claim that there is a high probability of further tightening of monetary policy. The only matter that is uncertain is whether we should expect an interest rate increase in this year or in the coming one.
We should note that the inflation projection doesn't have to be an indicator for the MPC. Especially when we take into consideration the latest projection, which was seriously overestimated and resulted in 50 b.p. interest rate increase in August.
Inflation in October rose slightly, mainly due to higher oil prices. Apart from that, the oil price began dropping, which, followed by depreciation of USD, can lead to a price cut at petrol stations-hopefully.
We are also watching the EUR/USD market. The cross has managed to break the 1.30 level. On Friday the currency dipped below 1.30, nevertheless all factors confirm that it's just a temporary correction. In the coming days the EUR/USD can reach 1.32. Will we approach 3.20 USD/PLN? It's highly probable.
How long will EUR strengthen against USD on international markets? Theoretically the trend is strong. This strong EUR painfully affects the European economy. The warnings of the ECB and Euro Zone finance ministers regarding the possibility of intervention are becoming more and more realistic. It seems to us that intervention should take place around the 1.35 area. When the EUR/USD broke 1.30, rumors concerning central bank intervention hampered further EUR appreciation.
This time it was just a rumor, but at 1.35, it might become a fact.
By Marek Zuber
chief economist TMS
What's next then?
The coming week sees the Monetary Policy Council (MPC) monthly meeting. Investors wonder if the MPC will raise interest rates. The latest inflation projection issued by the Polish Central Bank was soft in comparison to previous predictions. It still highlights an inflation increase in the first quarter of 2005, however, this shouldn't be as rapid as previously assumed. After the first quarter of 2005 inflation should drop due to statistical reasons, however a 2.5 percent yoy figure (the inflation target) in December 2005, seems rather unlikely.
So are we threatened by further interest rate increases? Members of the MPC claim that there is a high probability of further tightening of monetary policy. The only matter that is uncertain is whether we should expect an interest rate increase in this year or in the coming one.
We should note that the inflation projection doesn't have to be an indicator for the MPC. Especially when we take into consideration the latest projection, which was seriously overestimated and resulted in 50 b.p. interest rate increase in August.
Inflation in October rose slightly, mainly due to higher oil prices. Apart from that, the oil price began dropping, which, followed by depreciation of USD, can lead to a price cut at petrol stations-hopefully.
We are also watching the EUR/USD market. The cross has managed to break the 1.30 level. On Friday the currency dipped below 1.30, nevertheless all factors confirm that it's just a temporary correction. In the coming days the EUR/USD can reach 1.32. Will we approach 3.20 USD/PLN? It's highly probable.
How long will EUR strengthen against USD on international markets? Theoretically the trend is strong. This strong EUR painfully affects the European economy. The warnings of the ECB and Euro Zone finance ministers regarding the possibility of intervention are becoming more and more realistic. It seems to us that intervention should take place around the 1.35 area. When the EUR/USD broke 1.30, rumors concerning central bank intervention hampered further EUR appreciation.
This time it was just a rumor, but at 1.35, it might become a fact.
By Marek Zuber
chief economist TMS
