Poland Special | Polish inflation dilemma
Government proposed further cuts of indirect taxes to trim surging inflation. Presented measures will lower inflation in 1H22 but will push its trajectory up in 1H23. We see FY22 inflation at 7.4% before easing to 5.1% in 2023. The expected inflation trajectory is highly uncertain.
A lot has changed since the government announced the anti-inflation shield 1.0 at the end of November, which included lowering (or waiving) of VAT and excise duties on electricity, gas and fuels. While headline inflation continued to accelerate throughout 4Q21 and surged to 8.6% y/y in December, the energy regulator accepted massive increases of gas and electricity prices for households as of January 2022. As a response, the government extended the proposed measures and introduced further cuts of indirect taxes.
The proposed changes are a double-edged sword. While they will push headline CPI down in 1H22, they will be pro-inflationary in 1H23 compared to a no policy change scenario. As a result, the inflation peak will be postponed further and will likely be reached only in July at around 9.0% y/y. All in all, we expect inflation to average 7.4% in 2022 and to ease to 5.1% in 2023.
The anti-inflation shield will further deepen the rift between the monetary and fiscal policy without addressing the nature of elevated inflation. The fiscal impulse of about 0.7% of GDP in the form of tax cuts will further boost demand, instead of cooling it down, and will put the National Bank of Poland into a difficult position. Nonetheless, we expect the NBP to continue tightening as we see the key rate at 3.25% by mid-2022 and at 4.0% by the year-end.