On target for euro zone
The price of the European currency reached 4.19-the lowest level since March 2003. USD/PLN rate moved to 3.17, which was last seen in May 1997. There seems to be no significant sign that the Polish currency may suffer in the coming months. So will the dollar drop below zł.3 and euro below zł.4? European currency falls against the złoty with a slower pace than the 'green.' If the upward trend on e/USD remains, then we may experience the rate test of 3 USD/PLN. Exporters are worried about the złoty's continuing rise. According to the central bank survey, firms see a rate of zł.4.1 for the euro as key level for profitability. We are not far from this level now. However, the real issue today is the speed of appreciation not the direction of the move.
The major event of the last week was an MPC meeting. A month ago the monetary council decided to leave interest rates unchanged. This time almost everyone expected it to do the same. Several crucial factors supported this view: weak progress on the job market, soft wage pressure, strong złoty and dullness in investments. The last factor seems to be fundamental to further monetary decisions. Nevertheless no one should forget about household inflationary expectations. On Wednesday MPC decided once again not to raise the cost of money and sustained restrictive bias. The benchmark rate was kept at 6.50 percent. The central bank explained that inflation risk had fallen and the złoty's gains helped to stop further price growth. It might be a signal that the tightening cycle is over at least till the next year, although the central bank warns that inflation is likely to remain above the target (2.5 +/-1 percent) over a year and a half.
Macro figures did not satisfy the investors. Although the number of unemployed in Poland eased to 18.7 percent in October, investors worry about growth outlook. Recent data indicate that household consumption is slowing. Retail sales grew 'only' 4 percent (lower than the expected 7.4 percent). This stagnation is mainly due to a drop in car sales, clothing and shoes.
The Ministry of Finance signaled that the budget deficit may go down to 3 percent of GDP in 2006, which is required for euro zone entry. The main assumption is that the current positive economic situation must be maintained. All this may be hard to achieve in light of recent developments in parliament where two fiscal reform bills were not accepted. There are rumors that the ruling leftist party has lost its appetite for reforms as far as next year's elections are considered.
Krzysztof Rup, Warsaw Investment Group
The major event of the last week was an MPC meeting. A month ago the monetary council decided to leave interest rates unchanged. This time almost everyone expected it to do the same. Several crucial factors supported this view: weak progress on the job market, soft wage pressure, strong złoty and dullness in investments. The last factor seems to be fundamental to further monetary decisions. Nevertheless no one should forget about household inflationary expectations. On Wednesday MPC decided once again not to raise the cost of money and sustained restrictive bias. The benchmark rate was kept at 6.50 percent. The central bank explained that inflation risk had fallen and the złoty's gains helped to stop further price growth. It might be a signal that the tightening cycle is over at least till the next year, although the central bank warns that inflation is likely to remain above the target (2.5 +/-1 percent) over a year and a half.
Macro figures did not satisfy the investors. Although the number of unemployed in Poland eased to 18.7 percent in October, investors worry about growth outlook. Recent data indicate that household consumption is slowing. Retail sales grew 'only' 4 percent (lower than the expected 7.4 percent). This stagnation is mainly due to a drop in car sales, clothing and shoes.
The Ministry of Finance signaled that the budget deficit may go down to 3 percent of GDP in 2006, which is required for euro zone entry. The main assumption is that the current positive economic situation must be maintained. All this may be hard to achieve in light of recent developments in parliament where two fiscal reform bills were not accepted. There are rumors that the ruling leftist party has lost its appetite for reforms as far as next year's elections are considered.
Krzysztof Rup, Warsaw Investment Group
