Poland Weekly Focus | National Bank of Poland to keep key rate flat
The central bank to stay on hold but any change in the monetary policy setup cannot be ruled out. Friday’s conference of the Governor could bring more clarity about interest rate outlook. 5Y inflation average to hit the target in September, justifying policy normalization in 4Q21.
June 9 | Central bank to remain on hold. We expect the National Bank of Poland to keep key rate unchanged at 0.1% at this week’s meeting. Despite surging inflation and strong economic rebound we believe the NBP will most likely wait until November inflation and growth projections are out and would react only afterwards. However, any change in the monetary policy setup already in June cannot be ruled out. As inflation is expected to stay above the upper bound of the central bank’s target until the yearend and likely at the beginning of next year, NBP could deliver a 15bp hike to anchor inflation expectations. All in all, if inflation stays elevated around current level the 5Y inflation average will hit the central bank’s target at 2.5% in September 2021, while 5Y core inflation average will reach that level in April 2022, justifying policy normalization any time between 4Q21 and 1Q22.
Bond market drivers | 10Y yield stabilized around 1.85%. Last week, there were hardly any movements in CEE sovereign bond yields. The long end of the Polish yield curve moved close to 1.85%, while the spread against the 10Y German Bund stayed close to 205bp. While the long-end of the curve remained broadly unchanged, market expectations for monetary tightening are pushing the short-end further up. The 2Y Polish yield went up by almost 30bp since mid-May and moved toward 0.4% resulting in a visible flattening of the Polish LCY curve. Markets’ expectations for policy normalization are broadly in line with our forecasts as 10-15bp hike is priced-in by the end of the year, while key rate could increase by a total of 60-65bp within a year.
FX market drivers | Zloty awaits the MPC meeting. Over the course of the week, zloty followed other CEE currencies and continued to appreciate, fueled by bets of an earlier start of monetary tightening. EURPLN moved toward 4.46, which is the strongest level since mid-December when the central bank intervened on the FX market in order to tame zloty’s appreciation. Given that markets have already priced in some tightening, any moderation of central bank’s rhetoric could result in currency weakening. On the other hand, US CPI data for May and the ECB’s Governing Council meeting could both bring a surprise and thus affect the US dollar and the zloty.