Poland Weekly Focus | Inflation to marginally ease
March inflation should ease to 4.5% y/y. Lower oil prices likely to be offset by strong growth of food prices. Core inflation to remain unchanged at 3.6% y/y. Central bank to hold outright buy operation. Markets to continue focusing on COVID-19 development.
April 15 | Headline inflation to ease marginally. We expect inflation to ease marginally in March, to 4.5% y/y (-0.1% m/m), while the market consensus stands slightly below our forecast, at 4.4%. In our view, the disinflationary impact of low oil prices will be offset by strong growth of food prices. Risks of severe drought in Poland and possible lower crops due to COVID-19 will likely keep food prices on elevated levels in the coming months.
April 16 | Core inflation to remain unchanged in March. In our view, core inflation will remain stable at 3.6% in March. However, we see risks to the downside for our forecast if the effects of the lockdown have a strong negative impact on services prices.
April 16 | Central Bank to buy bonds on secondary market. The central bank will buy bonds on the secondary market in one of the two scheduled operations this month. The second outright buy operation will be held on April 29.
Bond market drivers | Spread drops below 200bp. In the aftermath of the unexpected rate cut by the central bank, we have seen a 20bp drop of yields along the whole LCY curve. As far as the long end of the curve is concerned, the 10Y yield dropped below 1.45% and continues going down toward 1.4%. As a result, the spread over the 10Y German Bund narrowed significantly and dropped visibly below 200bp.
FX market drivers | EURPLN remains locked around 4.55. The zloty remained mostly unchanged amid the unexpected interest rate cut. The reaction of the FX market to the announcement of the ‘Financial Shield’ program was also limited and we saw no increased volatility. The EURPLN fluctuated around 4.55, with any appreciation potential conditional on the improvement of the COVID-19 situation.