Poland Weekly Focus | Did inflation accelerate in July?
We see flash inflation for July moving up to 4.5% y/y. However, an upward surprise cannot be ruled out due to rising food and fuel prices. Zloty should be driven by EURUSD and pandemic development. MinFin and NBP to announce the operation scheduled for August.
July 30 | Inflation likely slightly higher in July. Flash estimate of July inflation will likely show a slight acceleration of price pressures. We expect the CPI to land at 4.5% y/y (0.1% m/m), somewhat below market consensus at 4.7% y/y. However, an upward surprise cannot be ruled out due to rising food and fuel prices. Core inflation likely returned into central bank’s target range for the first time since January 2020 as it could have dropped below 3.5% y/y. All in all, inflation pressure remains elevated in Poland and the recently announced increase of gas prices (by 12.4% y/y as of August) will likely push headline CPI further up, which could reach 5% y/y sometime in 4Q21.
Bond market drivers | 10Y yield fluctuated around 1.55%. The beginning of last week brought a strong drop on the long-end of the Polish LCY curve that mirrored core market developments. While the 10Y Polish yield went down by more than 10bp to 1.5%, 10Y German Bund dropped slightly less abruptly by around 5bp to somewhat below -0.4%. As a result, the spread vs. 10Y Bund widened toward 200bp at the beginning of the week but returned to 195bp by the end of the week. Last week, Polish MinFin sold papers worth PLN 6.8bn at the regular auction. Thus, Poland had already covered 79% of this year’s gross borrowing needs.
FX market drivers | EURPLN locked above 4.55. Over the course of the week, zloty was locked above 4.55 vs. EUR. Global sentiment remains dampened due to rising COVID-19 cases and its possible impact on the economic activity, which keeps EURUSD below 1.17. Moreover, the conflict with the EU and the approaching ruling of the Supreme Court on CHF loans weigh on the zloty. This week, the US dollar development will likely be the key driver for PLN.