Growth seems to have remained robust in central and eastern Europe (CEE)  as 2021 ended. Flash GDP data published by ING bank sees hope in a 5.7% expansion in Poland for the full year, not far from the 5.9% estimate, boosted by a resilient consumer sector and solid investment activity. This is what the 2021 GDP data tells about the condition of the economy in the fourth quarter of last year:

• Very strong economic growth in 4Q21 (with GDP dynamics over 7.0% YoY. Quarterly GDP data at the end of February should come in at more than 7% YoY in 4Q21)
• A continuation of the consumption boom at the same time; consumption increased by around 8% YoY in 4Q21 vs 4.7% in 3Q21
• The end of 2021  brought a slight decline in public consumption
• Investment growth even accelerated to 12% YoY vs 9.3% YoY in 3Q2; in sequential terms investments grew by a sound 10% QoQ (non-annualised)
• Inventories deducted 4pp from GDP
• Foreign trade subtracted 3pp

The consumption boom continues, but investment recovery keeps surprising to the upside. Overall GDP in 4Q21 presents a strong starting point for 2022 and a good chance for the continuation of the second-round effects on inflation – that companies can easily pass the rising costs to retail prices. That is why the National Bank of Poland’s president confirmed that rate hikes would continue at a higher level than priced by the market. Analysts point out that the terminal NBP rate penciled in at 4.5% in 2023 may already come to pass this year.

ING also considers the governor’s comment as a verbal intervention. The NBP is fighting to temper inflation in the short term because the rate hikes’ pass on CPI has a lag of four to six quarters. The more effective method to tame inflation in the short term is a stronger PLN, which is why the NBP is intervening via the expectations channel. Still, a significant strengthening of PLN will be difficult without an agreement with the EU on the Recovery Fund which may unlock EU funds. Importantly, should the Polish government fail to reach an agreement with the EC by the end of 2022, access to the Recovery Fund may be lost indefinitely?

Wages in enterprises saw double-digit growth (11.2% Year-on-Year) in December as businesses were paying bonuses planned for 1Q22 in late 2021 in order to do it before tax changes (under the Polish Deal tax reform) came into force. Data on average employment disappointed as its growth moderated from 0.7% YoY in November to 0.5% YoY in the last month of 2021. The number of jobs declined by 2,000 Month-on-Month in December 2021, after six years of positive December figures.

Producer price index (PPI) inflation increased to 14.2% YoY in December from a revised 13.6% YoY in November. Prices in mining and quarrying went down in monthly terms amid lower prices of copper and coal, while prices in manufacturing went up by a mere 0.2% MoM, posting the slowest monthly increase since December 2020. The last month of 2021 brought a sharp rise in the prices of electricity, gas, steam, and air conditioning supply (5.4% MoM, 16.2% YoY). PPI data show another wave of commodity price shock that is yet to feed into Consumer Price Index (CPI) inflation via rising costs. The December surge in wages growth is not yet a sign of second-round effects, but the risk of price-wage risk is mounting. High inflation in Poland is not only due to external price shocks but is also a consequence of expansionary economic policy in recent years and a consumption boom. The combination of high inflationary pressure, coming from strong domestic demand, and high external price growth means that in January 2022 CPI inflation will approach 10% YoY and Polish inflation will remain elevated even when external shocks die out. The Monetary Policy Committee will continue hiking rates up to 4% this year and 4.5% in 2023.

National Bank of Poland Governor Glapinski has made another hawkish pivot since the MPC meeting in January. Back then he said rates should rise to 3% or 4% as long as the economy was growing at a fast rate. Recently he said hikes would exceed market expectations and added that a stronger Polish zloty (PLN) would be consistent with the ongoing monetary tightening. Analysts find this as an important change of rhetoric and also as a verbal intervention aiming at strengthening PLN. The reasons behind this hawkish pivot are the following: the NBP recognizes upside inflation risk due to CPI developments recently and there has been very strong activity data.

Despite the implementation of two anti-inflation shields, ING average inflation forecasts for 2022 have increased, due to the following reasons:

• Sharp increases in energy and natural gas prices for both retail sector and businesses
• Historically high price increases in November and December 2021, suggesting CPI will go above 10% in January 2022
• Strong GDP for 4Q 2021: continued consumption boom, high overall GDP growth
• Highly likely second-round effects, namely how easily the companies may pass their high costs on to retail prices plus the wage-price spiral

As a result, analysts see average inflation in 2022 at 9.1% (in a scenario with anti-inflation shields staying till July) or, 8.1% (in case the shields are extended to the year-end); in 2023 inflation is expected to be 6.1%, and 7.1%, respectively.

After the most recent decision by the Monetary Policy Council on the fifth interest rate hike since October, and the third 50 basis point hike in the last three consecutive months, National Bank of Poland Governor Adam Glapiński participated in a press conference and provided his guidance on continued monetary tightening. Glapiński’s statements confirm a decisive hawkish shift in the MPC’s stance. The rate hikes are expected to continue, awaiting another 50 basis points in March, to see the terminal rate of 4.5% being reached in late 2022. A possible transition to the partial conversion of EU money on the market clearly points at further PLN gains in the latter part of the year. However, the stand-off with the EU over the judicial system remains a risk.

In effect, Poland appealed to the European Court of Justice regarding the conditional mechanism. In practice, this mechanism is used by the EC to freeze the Recovery Fund for Poland as long as the government does not want to close the Disciplinary Chamber of the Supreme Court, which is seen as a violation of judiciary independence. The last days brought some progress on two fronts the PiS government has with the EC. Firstly, Poland reach a compromise with the Czech Republic on the lignite mine the Czech government appealed to the ECJ, and secondly, Polish President Duda proposed to close the Disciplinary Chamber in Supreme Court and replace it with another body. Analysts still think it is far from a compromise that would lead to unfreezing the Recovery Fund for Poland, but the government’s attempts to make a deal with the EC is showing some kind of progress. This should support PLN and strengthen the pass-through from NBP hawkish comments to PLN. Importantly, should the Polish government fail to reach a compromise with EC till the end of 2022, Poland may lose 70% of €22bn allocated in grants to the country.