Poland: What was behind inflation surge in March?

Final inflation reading to confirm the flash estimate, which surprised to the upside and jumped to 3.2% y/y in March. Core inflation likely returned to 3.9% y/y in March. The central bank will hold first QE operation this month. Zloty to continue benefiting from the improved global mood.

Watch this week

April 15 – Final inflation for March

The flash CPI estimate surprised to the upside, arriving at 3.2% y/y (1.0% m/m) in March, well above our and market expectations, shifting this year’s inflation path up further. According to the available data, food price growth eased to 0.5% y/y, energy prices went up by 4.2% y/y, while prices of fuel for personal transport increased by 7.2% y/y. We expect the flash reading to be confirmed. On Friday, the National Bank of Poland will release core inflation for March; we see it returning to 3.9% y/y.

The increase of CPI in March was just the first that we expect to observe this year. In Apr-May 2021, the base effect from last year’s collapse of fuel prices will increase the pressure on the headline figure. In our view, CPI will exceed the upper band of the central bank’s inflation target at 3.5% and will most likely move above 4.0% y/y in that period. In early summer, we should see inflation slightly easing and dropping below the upper band of the inflation target, before returning toward 4.0% y/y in 2H21. We see considerable upside risks to our current FY21 inflation forecast at 3.0%. Despite high inflation pressure and CPI staying visibly above the target throughout the year, we expect the National Bank of Poland to remain on hold and keep the target rate unchanged at 0.1% until at least the end of Governor Glapinski’s term in mid-2022 and likely until the end of next year.

Last week’s highlights

• Central bank kept policy rate unchanged at 0.1%. Governor Glapinski reiterated during press conference that policy rate will most likely remain unchanged until end of his term in mid-2022.

• Governor Glapinski said that last year’s profit at NBP reached PLN 9.5bn, from which PLN 8.9bn will be paid to budget.

• MPC member Lon sees the current inflation level as appropriate and does not see need to cut interest rates. In view of MPC member Ancyparowicz, there is no risk of inflation persistently exceeding upper bound of target at 3.5%, but short-term jumps cannot be ruled out.

• Government announced that current restrictions will be prolonged until April 18, from previously planned April 9.

• According to preliminary data, unemployment rate went down by 0.1pp to 6.4% in March.

Market developments

Bond market drivers –10Y yield moves around 1.55%

Over the course of the week, the long end of the LCY curve was broadly unchanged and the 10Y yield moved close to 1.55%. A similar development was observed on the core market, where the 10Y German Bund fluctuated around -0.32%. The spread over the 10Y Bund narrowed somewhat toward 183bp. Last week, the MinFin sold papers worth PLN 5.4bn in the first bond auction planned for this month. The second auction is scheduled for April 23. After last week’s auction, Poland has already covered around 62% of this year’s borrowing needs. This week, on Wednesday, the NBP is scheduled to buy bonds. There are two QE operations planned for this month; the second should take place on April 29 and will be held if required. According to Governor Glapinski, the NBP will remain more active on the bond market. Furthermore, on Thursday, BGK will sell bonds and will offer papers maturing in 2027, 2033 and 2040.

FX market drivers – Risk-on mood supported zloty

The improved global sentiment and weaker US dollar have been positive for the zloty, which has appreciated since the beginning of 2Q21. After hitting a new 12-year low at 4.66 vs. the EUR, the EURPLN moved toward 4.53. Separately, the recent visible weakening of the zloty softened the NBP’s wording regarding the impact of the exchange rate on growth. In their view, the pace of the recovery will also depend on the future development of the exchange rate, unlike earlier, when the NBP communicated that the strong zloty will dampen the rebound. Moreover, the Supreme Court ruling on CHF mortgages has been postponed again until May 11. The upcoming decision of the European Court of Justice on FX loans at the end of April could provide legal guidance to local courts. We think that the zloty will weaken in the coming weeks and will return above 4.60 vs. the EUR, given the unresolved issue of FX mortgages and the central bank’s commitment to a dovish monetary policy, despite rising inflation.

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