Central and Eastern Europe: Disinflation, Rate Cuts, and Divergence in the Region

Poland: Central bank easing around the corner

Second-quarter growth in Poland most likely underperformed (with flat or negative year-on-year growth), given poor retail sales, industrial output and a 45.1 point manufacturing PMI reading in June. Consumer sentiment is improving but from a very low level. Moreover, real wages will just start to grow in the third quarter, after around a year of declines. Plus, the government’s cheap mortgage scheme has only recently started, arriving too late to give a boost to housing construction this year. Net exports are to be a key GDP driver this year.

We expect no policy changes from the National Bank of Poland in July. However, we estimate that the chances of a rate cut after the August Monetary Policy Council break have increased to 65-70%. This is following the guidance provided by some MPC members, including President Adam Glapinski, and the lower-than-expected June CPI print. We see more than one interest rate cut in 2023 as possible. Our short-term inflation forecast is optimistic, with CPI falling to single digits in August. Our long-term CPI forecasts are substantially far less favourable, however. Core inflation may stabilise around 5% year-on-year in 2024-25 given the tight labour market, the large rise in the minimum wage and the valorisation of 500+ child benefits.

The zloty continues to benefit from a mix of the current account surplus, more FX sales on the market by the Ministry of Finance, inflows from foreign direct investment, and portfolio capital. Some investors seem to expect a more market-friendly political environment after the parliamentary elections. We expect all those factors to persist at least until the elections. We expect EUR/PLN to gradually sink to, or slightly below, 4.40 in the coming weeks.

Despite higher overall 2023 borrowing needs after the state budget amendment, the government aims to finance them via the reduction of the sizeable cash buffer (PLN117bn as of the end of May) and FX funding, hence limiting Polish government bond (POLGBs) issuance compared to the initial budget bill. In tandem with the expectations for monetary policy easing, this suggests a further drop in yields across the curve and some tightening in asset swaps.