Poland Weekly Focus | Will central bank react to inflation surge?
National Bank of Poland to keep key rate stable at 0.1%. Recent developments increased chances for earlier start to tightening cycle. First hike could be delivered in November-December, but move this week cannot be ruled out. If NBP disappoints markets, PLN could weaken.
October 6 | NBP to remain on hold. All eyes will be on the National Bank of Poland this week. We expect the NBP to remain on hold and keep the key rate stable at 0.1%, but recent developments have boosted the chances for an earlier start to the monetary tightening cycle. Inflation surged to 5.8% y/y in September, which pushed the inflation trajectory further up, and this, coupled with an unprecedented interest rate hike in Czechia by 75bp to 1.5%, increased the pressure on the NBP. We think that the central bank could adjust its rhetoric and hence prepare the ground for the first interest rate hike, which could be delivered in November-December 2021. Currently, a hike by 40bp seems the most likely scenario, as a smaller signaling increase was earlier ruled out by the governor. In his view, such a decision would not affect inflation and is fully expected by the markets.
Bond market drivers | Curve shifted considerably up. Over the course of the week, the whole LCY curve shifted visibly up and flattened, with the 2Y yield increasing the most, by 40bp to 1.0%, the 5Y yield being up by 20bp to 1.7%, and the 10Y yield going up by almost 20bp to 2.27%. While pressure from the core markets was limited last week, local factors were in play, with an upward surprise in September inflation being the key driver. As the 10Y German Bund stabilized slightly below -0.2%, the spread against the 10Y Bund widened substantially to 246bp, the highest since the outbreak of the pandemic in March 2020. Separately, the MinFin announced the bond supply for 4Q21 and no regular auction is planned.
FX market drivers | EURPLN returned below 4.60. The zloty appreciated and moved toward 4.58 vs. the EUR on the back of rising market expectations for the start of monetary tightening in Poland. Firstly, the minutes of the September rate-setting meeting showed that the MPC rejected a motion to raise the key rate to 2%. Secondly, inflation surprised to the upside and jumped to 5.8% y/y in September, shifting the inflation trajectory further up. Monetary policy will also be in focus this week, with the central bank meeting scheduled for Wednesday and Governor Glapinski’s press conference planned for Thursday.