The clear-cut style of the comments is more surprising than the content.The NBR governor was quoted yesterday saying: "Normally, it (the next rate move) will be a cut, but I cannot say when. It is provided that we do not witness a deterioration in inflationary expectations.

A dovish bias is no surprise. It was visible in the press releases that accompanied the January and February rate-setting meetings. The surprise stems from the frankness of the comments and this leads us to believe the dovish bias is quite a strong one.

The NBR governor highlighted that core inflation is low and stable, thus calling for a rate cut, but such a change would hurt inflation expectations while headline inflation is elevated.At the same time he was quoted saying that inflation probably saw a peak in January and the central banks projection assumes it will soften significantly in 2H13 (almost halving from the 6% latest print). This suggests 2H13 could offer some room for easier monetary policy and helped 1Y FX swap rates soften yesterday almost 15bp to 4.50%.

On another note, the governor spoke against easing reserve requirements, mentioning that they favour rate cuts as a way to ease policy ("From a liquidity point of view we also have this decision not to change minimum reserve requirements yet. Although, for a period of quasi stagnation of the economy, releasing these reserves rather than cutting rates could stimulate lending and economic growth."). Reserve requirements cuts were not present in our projections but this adds more weight to this view.

On the other hand, rate cuts were also not included in our base scenario. We believe food prices might not behave as well as the central bank expects, forecasting 4.6% inflation at the end of the year vs 3.5% projected by the NBR, and this might keep inflation expectations uncomfortably high.

It will probably all boil down to the strength of this years harvest and early hints should be available in the May inflation data.The market consensus also favours flat rates for this year, with only 5 out of 14 analysts in a recent Reuters poll looking for cuts, so such comments could help tip the balance of the market. This should help domestic debt, which is currently fairing well.

Source BNE