Poland Weekly Focus: Will inflation again surprise markets?

Flash inflation for September to marginally ease to 5.4% y/y. Manufacturing PMI for September to mirror core market developments and to decrease on supply-side bottlenecks. MinFin to release quarterly bond supply. S&P scheduled to review Polish rating.

October 1 | Inflation to marginally ease in September. We expect the flash inflation for September to land at 5.4% y/y (0.3% m/m), slightly below the market consensus of 5.5% y/y. The marginal easing of inflation in September can be mainly attributed to a higher base from last year, but an upward surprise cannot be ruled out. However, we expect headline CPI to return to an upward trend in October and see it as likely to peak at the end of the year at close to 6.0% y/y. All in all, we see inflation on average at 4.5% this year and at 4.0% in 2022. We continue to think that the November inflation and growth projection of the National Bank of Poland will be crucial for the interest rate outlook, as it will show a higher inflation trajectory compared to the July forecast. However, the central bank will likely delay its first hike to 1Q22, when we expect a 15bp increase.

October 1 | Manufacturing PMI to ease in September. The Polish manufacturing PMI for September is expected to ease to 54.8 (down from 56.0 in August) and follow the pattern observed for major economies. In Germany, manufacturing PMI surprised markets to the downside, as it arrived at 58.5 in September, below the consensus of 61.4 and the previous month’s level of 62.6, landing at a 15-month low. Supply-side bottlenecks continue to be the main drag on the performance of the sector in Germany.

Bond market drivers | 10Y yield fluctuated around 2%. Over the course of the week, the Polish 10Y LCY yield oscillated around 2.0% despite an upward move on core markets. As the 10Y German Bund went up by 5bp w/w to -0.25%, the spread against the 10Y Bund marginally narrowed to 230bp. This week, the MinFin will publish its quarterly bond supply. As this year’s borrowing needs have been already fully covered, the MinFin will continue to pre-finance next year’s needs. On September 28, the MPC is scheduled to hold a one-day non-decisive meeting. The statement following the meeting will be released two days later, on September 30. It will be interesting to watch, given recent inflation development in Poland as well as the monetary tightening undertaken by other regional central banks.

FX market drivers | EURPLN remains locked above 4.55. Increased global risk aversion, boosted by issues surrounding the real estate sector in China and still present worries about the Delta variant and rising odds for faster tightening of monetary conditions in the US, weighed on the emerging market currencies. The zloty continued to depreciate and hit a five-month low of close to 4.64 vs. the EUR. This week, both local and regional factors could affect the PLN. On the one hand, the Polish Constitutional Court is scheduled to resume its session on the superiority of Polish law over EU law. On the other hand, the Czech National Bank will likely opt for a more aggressive tightening step and raise the key rate by 50bp to 1.25%. The rising discrepancy between the nominal interest rates and the dovish rhetoric of the National Bank of Poland compared to other regional central banks could result in the zloty weakening against local peers.

Download the full report