Regional bond rally continues

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Regional bond rally continues

While the koruna hit a three-week high against the euro and the forint extended its previous gains, the polish zloty slightly weakened and closed at the EUR/PLN 4.20 resistance on Wednesday. Meanwhile, regional government bonds continued to strengthen yesterday and for instance 10-year regional yields dropped by 12 basis points on average over the past week.

Polish government bonds lagged behind their peers yesterday as PM Tusk announced a set of measures that should support families with more than two children and announced higher than previously announced adjustment of pensions. Although the 3% deficit-to-GDP target for 2015 (a super-election year) could be in jeopardy due to both lower revenues and higher expenditures, Polish bonds could still remain attractive in weeks and months to come.

On the one hand, Polish bonds are clearly supported by the recent global bond rally, but domestic factors are in play as well. Recent macroeconomic data have rather disappointed. Moreover, geopolitical uncertainty related to the ongoing conflict in eastern Ukraine has taken its toll and is likely to weigh both on the Polish growth and inflation in the rest of the year, too.

Nevertheless, even though the overall economic conditions worsened and outlook for the inflation comeback to its target (2.50%) deteriorated in the second quarter, we still do not expect the Polish central bank to cut interest rates at its meeting next Wednesday (09/03). Still, we consider a rate cut at November’s meeting as likely as a new inflation report will be released that month. We don’t however exclude that the NBP could open a room for lowering interest rates already in October, especially should the details of the second quarter GDP (released this Friday) disappoint.