Weekly Focus Poland
Domestic demand was driving force of GDP growth in 4Q17, with private consumption increasing 4.9% y/y and recovering investment (up 11.3% y/y). PMI index dropped in February to 53.7. This week, MPC meeting should not bring any change in monetary policy, but new inflation and growth projection should attract some attention. However, global events (ECB meeting, labor data in US) are more likely to impact markets than domestic releases.
March 7: MPC to keep policy rate flat. New inflation and growth projection will be published. We do not expect any change in the policy rate at this meeting. While the growth has been solid, the inflation rate remains below the target of 2.5%, providing little reason to change the monetary stance. In March, however, the new inflation and growth projection will be published (until 2020). In the projection horizon, it is likely that GDP growth dynamics will become lower, justifying limited inflationary pressure. On the other hand, the recent acceleration of wage growth should turn into demand pressure sooner or later, pushing the inflation rate up slightly in mid-2018. The question is, however, whether the threat of the inflation rate overshooting the target is becoming increasingly likely. Without substantial inflationary pressure, the MPC will not be eager to change its relatively dovish bias. We expect the policy rate to remain flat until the end of the year.
Long-term yields continued to drop last week and the 10Y yield in Poland went marginally below 3.3%, while the spread vs. Bunds narrowed further toward 260bp (the level from the lower tail of the distribution since the new government is in office). Some upward correction is thus a likely scenario. The Ministry of Finance announced the bond supply for March, with a single auction and supply range of PLN 3-5bn. Demand should remain strong, which may add to the downward pressure on long-term yields. While the MPC meeting should remain mostly neutral for markets, as we do not expect any change in the statement, the ECB is likely to draw more attention from investors. Moreover, there are many macroeconomic releases scheduled this week in the Eurozone and US with potential market impacts.
The zloty weakened last Friday toward 4.20 vs. the EUR, but opened around 4.18 on Monday. We believe that there are global factors behind the EURPLN development (risk-off mode), as the macroeconomic outlook for Poland has not changed. This week, the new inflation and growth projection should confirm this situation: robust growth amid limited inflationary pressure. The MPC meeting should thus have little impact on the zloty. On the other hand, the ECB rate decision and labor data in the US are more likely to move the EURPLN.