Summary:

Polish Economy and Financial Markets.

In April's MACROscope:

• While the pace of real economic activity growth in Poland remains strong (with GDP growth probably still near 5% y/y in 1Q18), we have seen a number of nominal variables declining in recent weeks. The most striking example was the headline CPI inflation, which dropped to 1.3% y/y in March, significantly underperforming market forecasts for the second time in a row. The most puzzling part of the surprise was that the deviation from expectations was triggered mainly by the core inflation, which according to our estimate fell to 0.6% y/y in March, its one-year low. Interestingly, in contrast to the previous two months, such inflation behaviour in March was not a common phenomenon in Europe as some countries recorded a rebound. It is yet to be seen what factor exactly caused the surprising drop and how persistent it may be. We think that next few months are likely to show a slight rebound in inflation. But still, it seems that the entire inflation path for this year will be slightly lower than we estimated before.

• Nominal wage growth in February also proved lower than expected, slowing to 6.8% y/y. In this case, we think the surprise was caused mainly by one-off factor, i.e. change of timing of bonus payments in mining, and there is no other way for average salaries to go up faster and faster in the coming months due to deepening labour shortages. We think that the pace of wage acceleration will be a surprise for the Polish central bank, which does not belie it may exceed 7% y/y for good.

• So far, the NBP Governor Adam Glapiński triumphed at the last Monetary Policy Council’s press conference, after the surprising inflation decline. The message from the central bank seemed even more dovish than before and the suggested period of interest rate stabilisation was extended until 2020. However, the NBP head didn’t go so far to suggest that the next MPC decision could be a rate cut, as in his view any further rate reduction from current level would be problematic for the banking system. We still believe the next move will be a rate hike, but it will take place no earlier than in November 2019, after the central bank sees in black and white the evidence that inflation pressure has materialised and is persistent.

• Public debt and deficit were also among nominal variables that recorded declines, but in 2017. The still positive economic growth outlook for the coming quarters makes us believe that the fiscal situation will remain under control and the debt level may drop further in 2018, if not in nominal terms then at least as a relation to GDP.

• Lower inflation, dovish central bank and improving fiscal position – it all supported Polish bonds in recent weeks, leading to sharp reduction of yields. In the coming weeks we expect to see a correction, amid profit taking after recent rally and in reaction to mounting inflation and wage growth. Short end of the curve should remain supported by the low supply/demand ratio and a substantial bond redemption at the end of April.

• The EURPLN has been hovering near 4.20 for some time and we think it should continue doing so in the nearest future. Concerns about global economic growth, rising geopolitical tensions and dovish signals from the Polish central bank are likely to keep the zloty near recent levels in the weeks to come.

Click here for the full report (pdf)