Poland Weekly Focus | Central bank likely to keep rates stable
Second monthly QE operation scheduled for this week. MPC holds rate-setting meeting and stability of rates is most likely scenario, despite weaker than expected real economy data for April. 1Q20 GDP growth to be confirmed at 1.9% y/y.
May 26 | Unemployment increased in April. According to preliminary estimates from the Ministry of Family, Labor and Social Policy, the unemployment rate increased to 5.7% in April in the aftermath of the pandemic. The unemployment figure will complement last week’s releases in pointing to a worsening situation on the labor market.
May 28 | Central bank to remain on hold. Despite the negative surprise from April’s real economy data, we think that the central bank will keep rates stable. The massive contraction of industrial production and retail sales was due to the full-month closure of the economy. With a gradual easing of restrictions since early May, economic activity should begin to recover. Additional rate cuts could be considered in 2H20. However, the space for further easing is limited, as we do not expect the NBP to post negative interest rates.
May 29 | Inflation to ease in May. The effect of low oil prices will continue to weigh on the inflation figure, as we see it dropping to 2.9% y/y (-0.3% m/m) in May. We revised our FY20 inflation forecast down to 3.1%.
Bond market drivers | Long end of curve went up. Over the course of the week, the 10Y yield increased to above 1.4% from last week’s low of below 1.3%. With decreasing 10Y German yields, the spread widened to 190bp, which is, in our view, a justifiable level. This week, the central bank will be in focus, with another QE operation and rate-setting meeting. Stability of rates is the most likely scenario and April’s weaker real economy data should not influence the MPC. The MPC is likely to observe the recovery path from May onwards before taking any decision.
FX market drivers | Local factors did not affect zloty. Over the course of the week, the zloty benefited from global risk-on mood, followed other EMEA currencies and appreciated. The EURPLN was stronger in the direction of 4.50, despite weaker than expected real economy data. This week, the zloty might focus on local macro releases and the central bank meeting. In the event of further monetary easing, the zloty may depreciate and return to above 4.55 vs. the EUR.