Poland Weekly Focus | Rate hikes on the horizon?
MPC meeting should bring no change to the dovish stance of the National Bank of Poland and target rate should stay stable at 0.1%. However, surging prices and expected economic rebound could force NBP to start policy normalization. We expect up to two hikes in late 2H22.
May 5 | Central bank to keep target rate flat at 0.1%. We expect the National Bank of Poland to remain unaffected by the jump in headline inflation in April and to keep monetary policy unchanged at this week’s MPC meeting. In our view, the NBP will continue to stress that the current increase in inflation is temporary and driven by non-core items that are outside the scope of monetary policy. Furthermore, Governor Glapinski will likely reiterate that the economy needs to first fully recover in order to withdraw monetary support, appealing to major central banks’ stances. However, rising price pressure coupled with expected strong economic rebound might soon become troublesome for the central bank and we think that the NBP will likely begin to normalize monetary conditions in 2H22. We expect the MPC to deliver up to two hikes starting from 3Q22 and to raise the target rate to 0.5% by the end of the year.
Bond market drivers | 10Y yield soared to 1.7%. Over the course of the week, the 10Y Polish yield jumped by 20bp to 1.7%, despite the central bank buying PLN 5bn in Treasuries and state-guaranteed papers. The increase was driven by local factors as well as core market developments. This week, the MinFin will hold a switch auction, while a regular bond auction with supply of PLN 4-7bn is scheduled for May 21. As of the end of April, Poland had already covered 65% of this year’s borrowing needs. Moreover, the development bank BGK will tap the bond market twice this month on May 10 and May 24. Issuance on the international market cannot be ruled out. Separately, the central bank will hold two QE operations (May 12 and May 26), while more purchases cannot be ruled out.
FX market drivers | EURPLN moved below 4.55 Last week’s decision of the ECJ on CHF loans did not bring much clarity on the issue and it remains up to the local Supreme Court to provide legal guidance on the matter. The Supreme Court ruling scheduled for May 7 and May 11 could be decisive. Until then, we could see increased volatility on the part of the zloty. The strong appreciation of the US dollar did not weigh on the zloty, which also went stronger last week. This week, the National Bank of Poland meeting should not have any strong impact on the currency, as it will wait for the first CHF ruling at the end of the week.