Poland Weekly Focus | Inflation beyond peak in June
Flash inflation for June to land at 4.6% y/y, marking slight drop from peak reached in May. CPI to stay outside of central bank’s tolerance band in coming quarters and to land at or above 5% mark at end of year. MinFin, central bank and BGK to announce schedule of operations in July.
June 30 | Inflation likely somewhat eased in June. We expect flash inflation for June to land at 4.6% y/y (0.5% m/m), in line with the market consensus. Thus, CPI likely dropped from a peak reached in May 2021, but it will remain outside the central bank’s tolerance band in the coming quarters. Furthermore, we could see the headline figure at or above the 5% mark in 4Q21, due to the base effect from last year. The supply-side pressures (rising fuel and energy prices) are being amplified by increasing food prices and elevated services prices. Next week’s central bank meeting could shed some light on the interest rate outlook in Poland, as new inflation and growth projections will be released. We expect both paths to be revised upwards. However, the adjustment of monetary policy settings at the July meeting seems unlikely.
July 1 | PMI index to show another strong print in June. The manufacturing PMI index for June should follow core market developments and is expected to remain unchanged at around the 57 mark. In Germany and the Eurozone, PMIs for June went up further, reflecting solid demand and rising supply constraints.
Bond market drivers | 10Y yield up to 1.8%. Over the course of the week, the long end of the Polish curve went up by close to 10bp to 1.8%. Despite a slight upward move of the 10Y German Bund by 5bp toward -0.15%, the spread against the 10Y Bund widened back toward 200bp. Last week, the MinFin held a second switch auction and bought back papers worth PLN 3.9bn, while it sold paper totaling PLN 4.1bn. According to the MinFin, Poland has already covered 75% of this year’s borrowing needs planned in the budget act. This week, the MinFin will announce the bond supply for 3Q21 and auction schedule for July. The schedule of market operations in July will also be published by the central bank and BGK. We expect the NBP to stick to one QE operation in July and further limitations of purchases seem likely, in our view.
FX market drivers | EURPLN stayed on weaker side of 4.50. As the US dollar remained locked slightly above 1.19 vs. the EUR last week, the zloty focused on regional developments. While monetary tightening in Czechia and Hungary was expected by the markets, a more hawkish tone from both central banks was not anticipated. As a result, the koruna and forint appreciated. The zloty followed regional peers and moved slightly below 4.52 vs. the EUR by the end of the week. Flash inflation for June and the approaching central bank meeting will be in focus this week.