Weekly Focus Poland
Inflation eased in October to 2.1% y/y and the PMI dropped to 53.4. This week, the MPC meeting is due on Wednesday. While the decision on rates is rather obvious (no change), the new inflation and growth forecast is likely to be revised slightly upward. However, only a change in tone would impact the bond or FX market (not our baseline at this point).
November 8: MPC to keep policy rate flat and view new growth and inflation projection. The MPC meeting is the key domestic event this week. While the policy rate is broadly expected to remain flat, the MPC will know the new growth and inflation projection. Another upward revision of growth seems likely given the strong economic momentum. The underlying question is, however, to what extent robust growth and the tightening labor market will have an impact on increasing inflationary pressure and will be reflected in the higher path of expected inflation. While domestic factors favor increasing demand pressure, the inflation rate in the Eurozone is expected to ease next year to 1.2% (latest ECB staff projections) and that is likely to keep the headline CPI in check. In 2018, we expect average inflation of around 2%; however, in the middle of the year the inflation rate is likely to touch the target of 2.5%. In combination with strong growth in the nominal wage and ongoing tightening on the labor market, we may see core inflation finally rising. That would strengthen the hawkish voices that have recently been raised by some MPC members. Still, we consider this a rather distant scenario at this point, and expect the MPC to remain relatively dovish, especially as at the beginning of the year headline inflation should ease due to base effects. We currently see the first rate hike in 4Q17.
Spread vs. Bunds widened. Long-term yields went up in Poland towards the end of the week. This week, the MPC meeting could have an impact on the bond market only if the tone of the statement changes and becomes more hawkish. As we expect the status quo to be sustained (i.e. stability of rates for another year), we would see domestic events as neutral for the bond market. The spread vs. Bunds has widened toward 310bp.
Zloty traded in close range of 4.23-4.25 vs. EUR The FX market in Poland has been pretty stable over the last week, as the EURPLN moved in the rather close range of 4.23-4.25. Neither domestic events (flash CPI, PMI below expectations) nor international data releases (US payrolls) managed to move the EURPLN more visibly. This week, we do not expect the MPC to have any impact on the zloty if the status quo is maintained. Only a change in the tone of Governor Glapinski’s comments towards a more hawkish stance could be zloty positive.