Economic Analysis

In today's Eyeopener:
 
- Glapiński: tightening cycle is not concluded, we are waiting for new data and projection
- Unemployment rate unchanged in September at 4.8%
- Sejm approved G.Masłowska and I.Duda as new MPC members
- Zloty weaker, long-term yields higher amid dovish NBP rhetoric

The main local event ahead of us is the MPC decision on Wednesday. In our view, this time rates will go up by 50 bps. Admittedly, NBP President Adam Glapinski announced a month ago that the choice will be between zero and 25 bp, but he also stressed the dependence of further decisions on incoming data. And we think the latest data call for a stronger tightening than 25 bp. In particular, inflation did not decline at all in September as some of the MPC had assumed, but soared high above all analysts' forecasts. Our simple model linking the MPC's decisions over the past year to the monthly changes of annual inflation now points to +50 bps. It seems to us that the Council, with such pressure from CPI, will not dare to signal the end of tightening and may have serious doubts about announcing a pause in hikes (...)

NBP governor Adam Glapiński said at the conference that the MPC has not formally ended the monetary tightening cycle but rather paused, entering a wait-and-see mode. He listed four reasons behind such decision: (1) eleven rate hikes delivered so far have significantly cooled the credit market (killed mortgage loans, froze consumer credit); (2) inflationary shocks (energy shock, disruptions in supplies) started abating and over time the second-round effects should also start abating; (3) monetary policy transmission comes with a lag, full impact of already applied hikes will show up next year; (4) main central banks abroad started monetary tightening, which will lower global inflationary pressure, helping to curb inflation in Poland. (...)

Since the publication of our previous report in mid-July, a number of news have emerged that make us increasingly cautious about the economic outlook. GDP data for the second quarter surprised with a strong decline of 2.1% q/q and, although this was mainly the result of inventory correction, the outlook for consumption and investment is looking less and less rosy. The biggest risk is the situation on the energy markets in Europe, which face a real threat of a gas shortage during the winter season due to a reduction in supplies from Russia. There is growing evidence that sharp increase in market prices for gas and electricity is already urging some companies to reduce their operations. If supplies had to be rationed in the winter, the scale of the problem would be incomparably greater. (...)

In September's Rates and FX Outlook:
 

• Poland’s GDP growth failed to accelerate in 2Q16, with investments surprising negatively (-4.9% y/y), and we think that the second half of the year will see no significant improvement in economic growth. Although private consumption is likely to gain strength in the coming quarters, supported by solid labour income and the new child subsidies, it may take time until investments recover, and the positive impact of net exports will be hard to maintain (export growth may decelerate and imports accelerate). We expect a more significant investment pick-up next year, but by then the impact of the 500+ child benefit programme on consumption will be dissipating. Therefore, we forecast that GDP will grow 3.1% in 2016 and 2.9% in 2017.