The most recent strong move by Poland’s Monetary Policy Committee takes its main rate to 4.5%. ING Bank see it reaching 6.5% this year and 7.5% in 2023. That’s more than is being priced in by the markets. The move is positive for PLN and is likely to translate into a flattening of the yield curve. However, analysts believe more rate hikes are ahead. The global economy is experiencing a new commodity shock caused by the war in Ukraine, and the local labor market is very tight; it will be difficult to tame CPI inflation without sizeable monetary tightening. The fight against inflation must turn on.
Strong consumption should facilitate second-round effects, with companies passing higher costs (commodities, wages, etc) on to CPI. Fiscal policy will only worsen long-term inflation risks. Given that, CPI forecast for 2022 has been revised to 10.5% on average (with upside risks) and 8.4% year-on-year in 2023.
In ING’s view, it will put further downward pressure on €/PLN, pushing it towards 4.58-59 in the coming days. The higher pace of monetary tightening also paves the way for stronger zloty appreciation for the remainder of this quarter. €/PLN may reach 4.50 within the next couple of months. It is even more likely given signals that the €/US$ decline is losing momentum. As for Polish government bonds, analysts still expect POLGB yield increases and curve flattening. Not only do they think that the scale of monetary tightening will be larger than assumed by investors so far, but also believe that market participants will gradually start withdrawing bets on rate cuts priced in for 2023.
2022 GDP forecast are kept at 3.2%, but signal upside risks. Early 2022 data has been very strong (particularly industrial production), calling for first-quarter GDP growth of 7-8% year-on-year. The war in Ukraine will significantly affect trade (with a 50%+ drop in exports to both Ukraine and Russia). However, fiscal measures (3% of GDP announced so far) and the hosting of refugees (about 0.7-1.4% of GDP) should boost consumption, despite high CPI and confidence shocks.