Poland Weekly Focus | Will inflation surprise again?
Flash inflation for October expected at 6.4% y/y, but another upward surprise cannot be ruled out. Following release of 3Q21 real economy data, we revised our growth and inflation outlook for 2021-23. We expect lower GDP growth in coming years, with higher inflation trajectory.
October 29 | Flash inflation for October. We expect flash inflation for October to surpass the 6% margin for the first time since June 2001 and land at 6.4% y/y (0.6% m/m). Besides surging commodity and food prices, the core items remain pro-inflationary as well and we see core inflation at around 4.5% y/y in October. The flash inflation reading for October comes shortly before the MPC meeting on November 3 and might shift the balance in favor of another rate hike.
Forecast revision | We revise our growth and inflation forecast for 2021-23. While the performance of the Polish economy in 1H21 was better than expected and resulted in a burst of optimism about the growth outlook, recent months brought some cooling down of those expectations. Thus, we revised our FY21 growth forecast down by 0.3pp to 5.0% and FY22 GDP forecast down by 0.8pp to 4.8%. The main factor behind the revision is a more gloomy outlook for investments and rising supply-side issues. As headline inflation continues to surprise to the upside and surging global commodity and electricity prices remain in the spotlight, we revised our FY21 and FY22 inflation forecast upwards. We see CPI on average at 4.8% this year and at 5.2% next year. The headline figure should peak in 1Q22 between 6.5-7.0% y/y and we expect it to gradually move toward 4.0% y/y by the end of next year.
Bond market drivers | 10Y yield locked above 2.8%. The sell-off on the bond market continues, as the 10Y yield went up by another 20bp toward 2.85% and is the highest since May 2019. The spread against the 10Y German Bund widened further and climbed above 300bp, reflecting rising political pressure and market expectations for further tightening. At last week’s switch auction, the MinFin sold papers worth PLN 4.24bn and bought back papers worth PLN 3.95bn. Thus, around 8% of next year’s borrowing needs have already been covered. This week, the MinFin, BGK and National Bank of Poland should announce the schedule for next month’s operations. It will be interesting to see whether the NBP will hold a QE auction in mid-November, given the unexpected rate hike delivered in October.
FX market drivers | EURPLN back above 4.60. Following a short-lived strengthening toward 4.56 vs. the EUR, the zloty weakened again and returned to around 4.60 vs. the EUR. Global risk-off mood, together with the ongoing conflict with the EU as well as the unclear monetary policy outlook, remain the main drag on the PLN. Should market expectations for further tightening be disappointed next week, the zloty could weaken beyond 4.65 vs. the EUR.