Poland Weekly Focus | MPC to keep rates stable
MPC to keep rates on hold, but surging prices could create room for market speculation regarding rate hike. Inflation outlook changed considerably after inflation jumped to 3.4% y/y in December. Markets might be volatile, due to global geopolitical tensions.
The first rate-setting meeting of 2020 should bring no surprises and stability of rates is broadly expected. The strong increase of inflation in December considerably increased the risk of inflation remaining above the target throughout 2020 and averaging at 2.9% according to our latest inflation forecast revision. Therefore, market expectations for a rate hike may increase in the coming months, especially if inflation keeps overshooting the central bank’s target and tolerance band. However, we continue to think that stability of rates is the most likely scenario until the end of 2021
The long end of the Polish curve moved up at the end of 2019 and increased to above 2.10%. The first trading days of 2020 brought a reversal of that trend, as the 10Y yield decreased towards 2.05% at the end of the week, following core market developments. The Polish MinFin scheduled two regular bond auctions for January with bond supply at PLN 6-14bn. The auctions are scheduled for January 9 and 24. The surprisingly high number for December’s flash inflation pushed 10Y yields up to above 2.1% on Tuesday. The central bank meeting should, however, be neutral for the markets.
At the end of the year, the zloty continued to appreciate against the EUR and the EURPLN stayed visibly below the 4.30 margin. In the first trading days of 2020, the EURPLN tested the July lows of around 4.24 and shortly went below this level on Monday. In the coming weeks, we expect the zloty to somewhat weaken and reach 4.28 vs. the EUR at the end of 1Q20.