ECB dust set­tles to re­veal un­shaken poli­cies in emerg­ing Europe

The Pak Banker - - COMPANIES/BOSS -

While tremors shook Europe's emerg­ing mar­kets af­ter Mario Draghi an­nounced new mon­e­tary stim­u­lus on Thurs­day, the re­gion's cen­tral banks will stick to their guns on how they'll tackle pol­icy this year.

In­vestors in­creased bets on more mon­e­tary eas­ing from War­saw to Bu­dapest af­ter the Euro­pean Cen­tral Bank cut bor­row­ing costs and ex­tended its as­set-buy­ing pro­gram. They quickly re­versed, how­ever, af­ter Draghi said he didn't see a need to lower in­ter­est rates fur­ther, de­cou­pling the re­gion's as­sets from other emerg­ing mar­kets.

The ECB pres­i­dent ef­fec­tively quashed con­cern that Pol­ish, Hun­gar­ian and Czech as­sets -which of­fer higher re­turns than neg­a­tive-yield­ing euro coun­ter­parts -- would at­tract in­flows that would drive down in­fla­tion that's al­ready below tar­get across the re­gion. While many econ­o­mists had ear­lier pre­dicted the need for mon­e­tary eas­ing across east­ern Europe, the con­sen­sus now shows lit­tle de­vi­a­tion from the poli­cies that pre­vailed be­fore the ECB met.

"I don't think it's fun­da­men­tally changed any­thing," Wil­liam Jack­son, from Lon­don­based Cap­i­tal Eco­nom­ics, said by phone on Fri­day. "Fur­ther ECB eas­ing was ex­pected to some ex­tent and each pol­icy board and their rel­a­tive dovish­ness or hawk­ish­ness will de­ter­mine whether there will be fur­ther eas­ing or if they'll just keep their pol­icy loose."

Poland was the first to take pass at re­act­ing on Fri­day, as pol­icy mak­ers left the main rate un­changed at 1.5 per­cent. But that doesn't mean that ev­ery­one will stand pat. Hun­gary's cen­tral bank, which vowed last year to keep its bench­mark rate un­changed through the end of 2017, will prob­a­bly re­sume cut­ting from the record- low 1.35 per­cent, Vice Gov­er­nor Mar­ton Nagy said Thurs­day be­fore the ECB de­ci­sion. The bank, which holds its next rate meet­ing March 22, will ad­just its in­ter­est-rate cor­ri­dor "im­mi­nently," he said.

Mar­ket bets il­lus­trated there's lit­tle need for dam­age con­trol. While some cur­ren­cies surged, emerg­ing Europe un­der­per­formed other re­gions. The forint has weak­ened 0.4 per­cent against the euro in the past two days while the leu and the ko­runa have been lit­tle changed and the zloty is up 0.2 per­cent. The ru­ble and South Korean won, which mainly trade against the dol­lar, have ral­lied at least 1 per­cent in the pe­riod.

For­ward-rate agree­ments, which in­vestors use to bet on fu­ture bor­row­ing costs, erased a jump in ex­pec­ta­tions of fur­ther rate eas­ing on Thurs­day. They in­di­cated that Hun­gary would cut by 33 ba­sis points and Poland by 29 ba­sis points by De­cem­ber, lit­tle changed from lev­els two days ago. Czech FRAs sig­naled 17 ba­sis points of re­duc­tions, com­pared with 26 ba­sis points the day be­fore the ECB move.

Poland's Mon­e­tary Pol­icy Coun­cil didn't budge Fri­day as it sat for the first time this week af­ter eight of its 10 mem­bers were re­placed. The coun­cil last cut the rate by half a point to a record low a year ago and then de­ferred any ac­tion to its newly con­sti­tuted suc­ces­sor. Pol­icy mak­ers there pe­rused new in­fla­tion and GDP pro­jec­tions and must bal­ance the prospect of eas­ing with the im­pact it may have on the fi­nan­cial sec­tor.

"The new MPC is in a dif­fi­cult sit­u­a­tion at the start of its term," Ma­ciej Rel­uga, chief econ­o­mist at Bank Za­chodni WBK, said by phone. "Meet­ing the in­fla­tion tar­get sets the case for more rate cuts, while wor­ries about the fi­nan­cial sta­bil­ity say rate show cuts as pos­si­bly dan­ger­ous."

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