Monitoring Poland: No respite from inflation; hikes set to continue

Poland faces persistently rising inflation and zloty weakness. The NBP’s forecast of CPI stabilising after the summer holidays failed to materialise. This puts Monetary Policy Council calls to end, or at least pause hiking into question. We expect at least two 25bp rate hikes in 4Q22. The cycle should conclude at 7.5% in 1Q23 and moderate cuts are likely in 2H23. But suspension of the government’s anti-inflation measures should cause CPI to return above 10% YoY in 2024.

The economy is on track to expand by about 0.6% quarter-on-quarter seasonally adjusted in the third quarter of 2022, after a decline of 2.1% QoQ, avoiding a technical recession in mid-2022. Annual growth may slightly exceed 3% in the third quarter and 2022 full year GDP should reach c.4%, before slowing to 1.5% in 2023 amid the intensifying energy shock, deteriorating external conditions and elevated inflation. Elevated inflation is projected to cool down consumer demand, while high interest rates is likely to hamper investment activity.

In September CPI inflation rose to 17.2% year-on-year (a 25-year high) shattering hopes for stabilisation after the summer. Upward pressure from high energy prices is accompanied by strong second-round effects as businesses pass higher costs onto their output prices. Core inflation resumed strong growth after summer stabilisation, and food price adjustment is continued. Proposed fiscal measures targeted at cushioning increases in electricity and gas prices for households should allow the NBP to ease in the second half of 2023. On the flip side these measures, when suspended, should cause elevated inflation to return in 2024.

The zloty remains under pressure. The sentiment is unlikely to change given the unfavourable external environment (especially mounting tensions between Russia and the West) and the NBP signaling a prompt end to its tightening cycle. Still, positioning against PLN is already significant (as indicated by elevated costs of FX swaps) and should offer some scope for a recovery of the zloty if external factors improve. However, €/PLN is unlikely to move significantly below 4.8 in the fourth quarter of this year regardless.

Curve steepening is the most likely scenario for the fourth quarter. The NBP signaling a prompt end to its tightening cycle should help stabilise short-end paper, despite high CPI. Core markets developments should continue to affect the long end. Moreover, the market may be underestimating public sector borrowing needs in 2023, which in turn could translate into wider asset swaps on the long end. Given deposit outflow from local banks, foreign investors are likely to be the key local debt buyers next year.