Poland: 10Y yield followed core markets

Central banks in focus this week. MPC expected to keep target rate stable at 1.5%, while ECB most likely to deliver monetary stimulus. Uncertainty regarding Brexit and upcoming ECB decision to be key drivers of bond and FX market. If ECB disappoints market expectations regarding size of stimulus, we could see a reaction from EURUSD and zloty.

This week:

• September 11: MPC to keep rates unchanged

We expect the MPC to keep the policy rate stable at 1.5%. We think that the MPC will sustain its dovish rhetoric and will most likely reiterate that the current inflation level is not worrisome. Inflation growth slowed down in August, as the headline figure came in at 2.8% y/y. Moreover, price pressure is mostly being driven by non-core items and hence remains out of the scope of monetary policy. However, we see mostly upside risks to the inflation outlook stemming from energy and food prices development next year. All in all, low inflation in the external environment and the expected monetary easing to be announced on September 12 by the ECB will support the stability of rates in Poland. We expect that the MPC will keep rates at record low levels until the end of 2020 or beyond.

• September 13: Flash inflation to be confirmed

We expect that the flash inflation estimate for August will be confirmed at 2.8% y/y (0.0% m/m). In our view, headline CPI will move within the upper bound of the target until year-end and will most likely peak at the end of 1Q20. Uncertainty regarding energy price development next year and the base effect could shift inflation above 3.5% in 1Q20.

Last week's highlights

• S&P expressed concern over the possible implications of the ECJ ruling on FX loans, but the government remains more concerned about the global growth slowdown.

• The Ministry of Family, Labor and Social Policy reported that the unemployment rate stood at 5.2% in August.

• The Ministry of Finance announced that 85% of this year's borrowing needs (according to the budget act) has already been covered and 20% of 2020 needs has been pre-financed.

Bond market drivers

• 10Y yield followed core markets

Over the course of the week, the 10Y yield increased to 2% on the back of improved global sentiment and the somewhat lower risk of hard Brexit. As a result, the spread vs. the 10Y German Bund widened to 265bp. However, the spread widening is most likely due to the fact that investors started building up their expectations ahead of the ECB meeting later this week. We expect that Polish yields this week will follow core market developments.

• Weekly performance of 5Y bonds (% in EUR)

Yields increased considerably last week, amid the improving market mood and a likely rotation into stocks by investors. Spreads above German Bunds also increased in most CEE countries. A major outlier from this development is Croatia, where 10Y yields continued to slowly decline. We have therefore cut our 10Y HRK yield forecast. Also important to note is the increase in short-term rates in Romania, Poland and the Czech Republic in the last two weeks, indicating the lower probability of monetary easing assumed by the markets.

FX market drivers

• Zloty took breath and went stronger

Last week, the zloty strengthened and the EURPLN closed the week marginally below 4.34. The zloty followed other CEE currencies and benefited from the improved global mood. The better than expected PMI for August could have also support the zloty. The ECB meeting will be the key event for the zloty this week. The gloomy outlook for the economy has pushed market expectations up, so a risk of a disappointment exists, which would in turn trigger a reaction from the EURUSD and influence the zloty.

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