Inflation under pressure of higher electricity prices
To avoid any strong impact of increase in price of CO2 emission allowance on inflation, electricity prices have been frozen in Poland since the beginning of 2019. In order to comply with EU legislation, energy prices will be market-based as of July 2019 for medium and big employers. We estimate that a 50% increase in electricity prices for corporates would result in headline inflation going up by 0.4pp from 4Q19.
Energy prices in Poland started increasing at the beginning of 2018, in the aftermath of strong growth in the price of carbon dioxide emission allowances. Since January 2018, the price of CO2 allowances increased from around EUR/t 7.5 to almost EUR/t 25.
The one-off increase in energy prices for corporates would shift the inflation trajectory up by 0.4pp over a quarter, starting from 4Q19 via increases in renting costs, water supply services, health services and education. In such a scenario, CPI would reach on average 3.2% y/y in 4Q19 and would peak at 3.8% y/y in 1Q20 compared to our current forecast of 3.4% y/y.
Currently, the MPC sees stability of rates as the most likely scenario, possibly until the end of Governor Glapinski’s term – until 2022. We believe that the MPC would tolerate temporarily higher inflation, as it is being pushed mainly by external factors that are beyond the influence of monetary policy. All in all, we keep our call for stable rates for this and next year.