The Eurozone hasn’t entered the period of interest rate cuts, contrary to what some might expect. It’s crucial to remember that the last increase occurred in September. The cycle of hikes in the Eurozone concluded notably later compared to Poland.
Yesterday’s meeting of the European Central Bank brought no surprises. The market anticipated no changes in the interest rates, and that’s exactly what it got. Confirmation that rate cuts will need to wait was also expected, and it was delivered. Unfortunately, clear guidance was not provided, and despite us all hearing the same statement from Christine Lagarde, the conclusions drawn by analysts vary. Some suggest that reductions could occur as soon as April. The dominant scenario is for June, but July is not ruled out either. The problem with such forecasts always remains the same. They strongly depend on what happens in the meantime. If we see weaker economic data, they will validate the accelerated rate cuts. As a result, a feedback loop starts in the market – the weaker the data, the weaker the euro. Additionally, the weaker the data, the faster the rate cuts, hence a weaker euro.
Yesterday, we also learned of data from across the ocean. The GDP in the USA is unfortunately presented in an annualized version. In this format, it increases by 3.3%, compared to an expected 2%. As a result, instead of learning the actual changes in the economy, we learn how the economy would have changed if the entire year was like the last quarter. The deviations from expectations in this measure are extraordinarily high for GDP forecasts. This is roughly a fourfold error of expectations compared to the quarter. However, a GDP higher by 0.3% than expectations would still be a good outcome that would justify the strengthening of the dollar against the euro, although it looks less impressive than 1.3% in the annualized indicator.
In Turkey, the interest rate has risen by 2.5%. This sounds like a significant increase until you learn that it’s an increase from 42.5% to 45%. The reason for the rate hike is, of course, a battle against inflation, which is currently growing. An additional issue will be the matter of the base effect. We are entering months that will be compared to last year’s inflation low, which will likely result in a higher annual growth rate. This will not necessarily indicate ineffectiveness of the current measures.
Maciej Przygórzewski – main analyst at InternetowyKantor.pl and Walutomat.pl
