Weekly Focus Poland
Economy expanded 4.6% in 2017 – highest growth rate in six years – while market sentiment remained strong in January (PMI at 54.6). MPC meeting this week unlikely to bring any new insights, with “no rate hike this year” stance to be maintained. Long end of curve follows development on global market, while zloty has been slightly weaker.
February 7: MPC to keep policy rate flat at 1.5% The MPC is broadly expected to keep the policy rate flat at 1.5% and maintain its dovish bias. Governor Glapinski keeps reiterating his view that the policy rate will remain flat this year. The majority of MPC members seem to share this view, as even hawkish MPC members have begun to soften their tone on monetary tightening. Headline inflation eased at the beginning of the year, as was expected, while core inflation remains subdued, below 1% and the zloty has strengthened recently. All these factors support a stability of rates scenario. Inflationary pressure has been limited so far despite the robust growth and recent acceleration of nominal wage growth. All in all, at this point, the arguments work against monetary tightening. Labor market development is key to watch, as is to what extent demand pressure will be rising. We believe that the rate hike will arrive only in 2019 unless inflation expectations suggest that overshooting the target of 2.5% is becoming increasingly likely.
10Y yields have been holding above 3.5% throughout the last week. Although the 10Y German yields went further up towards 0.75%, the spread has narrowed slightly, alleviating some of the pressure from the Polish bond market. This week, the MPC should not bring any major changes as far as monetary policy directions are concerned. Stability of rates seems the most likely scenario this year. The long end of the curve should thus remain sensitive to global developments.
Correction on FX market Last week was marked by correction on the FX market and the EURPLN returning toward 4.16. This week, the MPC is holding its meeting and this may have an impact on the FX market. Recently, Governor Glapinski’s stance about uncertainty regarding a rate hike in 2019 was read as hawkish in tone, but the MPC minutes confirmed that the policy rate should not change any time soon. While the decision should not bring any surprises, the press conference may set the tone for the markets. If Governor Glapinski clearly returns to dovish wording, the zloty may remain somewhat weaker.