Economic Analysis

In today's Eyeopener:

- Fitch will consider a rating cut if Poland acts towards leaving the EU
- US industrial output disappoints
- Dollar stable, zloty and other EM currencies weaker
- Further significant loss of value of Polish government bonds
- Today wages and employment data in Poland, rate decision in Hungary

After the weekend we get back to the Polish data releases. There is a long list of September’s indicators in the agenda: core inflation, wages and employment, PPI, industrial and construction output, retail sales, money supply, plus new business climate indicators and consumer confidence survey. After another inflationary surprise (final CPI in September revised up to 5.9% y/y), market will be looking for more hints regarding inflationary pressure. (...) On Tuesday the European Parliament will debate the recent ruling of the Polish Constitutional Tribunal with Polish Prime Minister Mateusz Morawiecki and European Commission President Ursula von der Leyen participating in the meeting. It may be important event, signalling where we are heading in Poland-EU relations.
 

September CPI inflation was revised higher to 5.9% y/y from flash reading at 5.8% y/y and versus August print at 5.5% y/y. According to our estimates core inflation rose in September to 4.2% y/y from 3.9% y/y in August (the official data will be released by NBP on 18 October). We expect CPI to easily breach 6% y/y in October and to end the year above 6.5%. A reading above 7% in early 2022 is also increasingly likely. In our view the further rise of inflation will make MPC hike rates several times more, possibly already at the November meeting.

Just after we have released our MACROscope report, two important events took place, which – in our view – deserve a quick update of our predicted market scenario. First of all, the Monetary Policy Council decided to raise the main reference rate by 40bp, from 0.1% to 0.5%. Glapiński flagged that it was the MPC’s intention to surprise markets with a strong move, to create some potential waiting room before next hikes. But he also said the MPC deliberately neither signalled likely continuation of rate hikes nor ruled it out in the post-meeting statement, as the next decisions will be data-driven. Second, The Polish Constitutional Tribunal ruled that part of EU law is incompatible with the Polish Constitution, which has immediately triggered the European Commission’s warning.

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.