According to the flash estimate published by ING, the CPI in September rose to 5.8% y/y from 5.5% in August. The strong price pressure in Poland is due to the continued rise in fuel prices (+28.6% y/y) and further increases in food prices (+4.4% from +3.9% in August). Energy prices rose 7.2% and are expected to accelerate further due to the already announced increase in natural gas prices, starting in October. In addition to supply regulation factors, persistently high core inflation is being delivered to consumers. Analysts estimate that the core is rising steadily to 4.1% y/y from 3.9% in August. The prices of goods continued to rise as producers passed on the increase in costs to consumers in the face of sustained demand. The prices of services also remained high. At the same time, it also takes an increase in wages to drive up costs. Inflation in Poland is expected to continue to rise and could reach 7% by the end of the year. It is expected to average 4.5% next year, 1pp higher than the MPC’s upper limit for deviations above the stated target.

High inflation in Poland is polarizing opinions within the OAG. In September there was a proposal (without reaching a majority) to increase the reference rate from 0.1% to 2%. The OAG majority continues to indicate that monetary policy changes will be justified if:

1. uncertainty about the pandemic and its impact on the economy should decrease
2. forecasts indicate the continuation of favourable economic conditions
3. there is a risk that inflation will rise above the NBP target in the coming years

Against this backdrop, the November NBP inflation projection could be decisive, as it could indicate an even higher inflation path, with GDP growth projected above potential.

The market is pricing in a rate hike of +40bps this year. The fourth wave of the pandemic in Poland is underway and its peak could come right around the OAG meeting in November. In addition, the balance of payments is deteriorating. After a revision of the data for 2Q21, the current account surplus fell from almost 3% of GDP last December to around 0.8% of GDP in 3Q21. The Council has repeatedly stressed the importance of the zloty exchange rate for GDP growth. Here the MPC could interpret the decrease in the current account surplus as a threat to GDP growth rather than the second warning (after record inflation) of an overheating of the economy. If this were to reduce the propensity to tighten monetary policy, a weakening of the zloty in November is possible. The low scale of tightening of the NBP in November could push EUR/PLN to 4.80 at the end of 2021. And this would only increase inflationary pressure at the national level, especially in the context of supply constraints for exporters and high inflation in trading partners. Not surprisingly, inflation in Germany jumped to 4.1% y/y in September, the highest rate in 30 years.

Industrial production in August grew 13.2% y/y, compared to 9.8% in July. The result was slightly lower than consensus expectations (+13.8%). The acceleration of the annual pace of growth was no surprise, driven as it was by 2 working days more than last year. What is worrying is the second month-on-month decline this year. Growth in computer production slowed to 15.8% y/y from 25.9% in July, as did the production of electrical equipment (to 15% y/y from 26.4% in July). Car production declined for the second consecutive month, 12.9% year-on-year after a 4.7% decline in July. This is due to the continuous problems of access to production components, mainly microprocessors.

Given seasonal adjustments, production in August fell 0.3% year-on-year. Manufacturing firms are increasingly affected by supply-side problems. In August, more than 28% of them indicated that the shortage of raw materials, materials, and semi-finished products are obstacles to their further development. So businesses are taking advantage of the improvement in demand to pass on the increase in the cost of finished product prices. Producer price inflation (PPI) in Poland accelerated to 9.5% year-on-year in August, from 8.4% in July.

In this scenario, in 2022 budget revenue is forecast at PLN 481.4 billion and expenditure at PLN 512.4 billion. This produces a central government budget deficit of PLN 30.9 billion. The general government deficit is expected to fall to 2.8% from 5.3% of GDP this year. Expenses are about PLN 7 billion higher than expected in August but should be offset by an improvement in revenues, reflecting this year’s outperformance.

Despite no tangible changes in macroeconomic assumptions and projected deficits, the new bill assumes general government debt at 56.6% of GDP next year, up from 55.5% expected in the August proposal. Public debt according to local methodology is also higher, which suggests that the government plans to finance spending outside the central government. Financing should be covered by sending Polish government bonds (POLGB) to public institutions outside the central government. This is presumably why public debt has grown in the latest projections.

In order to estimate what the total magnitude of the fiscal expansion affecting the economy would be, ING estimates the overall structural balance. This is expected to reach 5.2-5.5% of GDP, up from around 4.5% this year. These are:

1. the general government deficit at 2.8% of GDP
2. we add at least the 0.5% correction for a cyclical improvement on the revenue side
3. add non-repayable aid from the EU Recovery Fund (we expect an equivalent of 1% of GDP to be spent next year)
4. 1.1% of expenditure on projects outside the central government budget

The above suggests that the government aims to provide another strong fiscal boost in 2022, 0.7-1.0% higher than in 2021. The structural gap in 2022 is expected to widen to 5.2-5.5% of GDP from 4.5% this year. This high level of fiscal expansion comes at a time when GDP has already fully recovered from the pandemic and the positive output gap in 2022 is already expected. With the effect of bringing inflation to persistently high levels next year as well.