Economic comment

Data released today sent a stagflationary tone. Industry recorded an unexpected 1.2% y/y output decline (consensus +0.8% y/y, our forecast +1.4% y/y) and employment was lower than expected (0.8% y/y in February vs. our forecast of 0.9% y/y and market consensus of 1.0% y/y). Wages, on the other hand, accelerated in February to 13.6% y/y from 13.5% y/y in January, while we expected a slowdown to 12.0% y/y and the market saw 11.9% y/y. Although PPI inflation fell to 18.4% y/y in February from 20.1% y/y in January, it was higher than expectations and the previous reading was revised upwards. The figures support our scenario that the Polish economy continued to decelerate at the beginning of the year (we expect the economy to bottom out in 1Q) and that inflation will fall, but slower than the NBP expects.

In February, core inflation set another record, with inflation ex food and energy prices up to 12.0% y/y from 11.7% y/y in January and 11.5% y/y in December. We thought that core inflation would set its peak in February, just like headline CPI. Currently is seems less certain and core may stay at elevated levels for longer. We do not think that core inflation will give the MPC reasons to think about rate cuts this year.
In January, Polish C/A balance showed an unexpected surplus of €1.43bn while we and the market were prepared to see a deficit of around €1bn The main source of the surprise was a sudden deceleration in imports, to 3.1% y/y from 12.1% y/y.

CPI rose to 18.4% y/y in February, in line with our forecast and a bit lower than the market consensus (18.5%), while the data for January were revised down from 17.2% to 16.6% y/y. We think this is the peak of inflation in y/y terms. However, the monthly price dynamics were well above expectations - prices rose by 1.2% m/m in February against our forecast of 0.7% m/m and the market consensus of 0.8%, and by 2.5% m/m in January (revised from 2.4%).
The most important takeaway is that despite the annual inflation rates in January and February coming below consensus, the data show much higher inflation inertia than expected – the price momentum is still very strong and shows no signs of abating. These data suggest a higher inflation trajectory towards the end of 2023 than we thought, and reduce the likelihood of reaching inflation levels that could lead the MPC to contemplate rate cuts.