Rising PCE inflation pushes back rate cuts, and the Fed stays in "wait and see" mode
Our forecast is below market consensus (3.0%), so its realization would be negative for the zloty and Polish bond yields.
On Thursday U.S. inflation data will be released. We expect overall PCE inflation to have risen to 3.8% year‑over‑year in April from 3.5% in March, reflecting the growing pro‑inflationary impact of the energy shock linked to the war in the Middle East. At the same time we forecast core PCE inflation to have increased to 3.3% year‑over‑year in April from 3.2% in March, so its rise remains clearly lower than overall inflation.
Such a data set would be unfavorable from the Fed’s perspective and would strengthen arguments for keeping rates unchanged for a longer period, although in our view it would not yet be sufficient to prompt the FOMC to resume hikes. In this context the tone of the minutes from last week’s April FOMC meeting is important, as it indicated a growing hawkishness. Most FOMC members noted the stabilization of the labor market, while the risk balance shifted clearly toward higher inflation.
Moreover, the minutes noted that most participants allow for tightening monetary policy if inflation stubbornly remains above target.
Thus the Fed remains, in our view, in "wait and see" mode, and the risk balance for the next rate move has shifted more toward a hike than a cut.
Our base scenario still assumes rates unchanged until early 2027 and a single final cut in Q2 2027, although the scale and persistence of the energy shock mean that a more hawkish Fed response cannot be ruled out.
On Friday a preliminary estimate of Polish inflation for May will be released. We expect CPI inflation to have risen to 3.8% year‑over‑year from 3.2% in April due to faster fuel price increases (low‑base effect) and higher core inflation (3.5% year‑over‑year in May versus 3.0% in April). Our forecast is above consensus (3.7%), so its realization would be slightly positive for the zloty and bond yields.
Stagflation signal from the euro area
Last week preliminary May PMI indices for the euro area and Germany were released, showing a stagflationary tone. In the euro area the composite PMI fell to 47.5 points in May from 48.8 in April, reaching the lowest level in 31 months, with further deepening of service activity decline (46.4 versus 47.6) and slowing manufacturing growth (51.0 versus 52.3). In Germany the composite PMI rose slightly to 48.6 from 48.4 but remained below the 50‑point threshold.
Service improvement (47.8 versus 46.9) was offset by a clear deterioration in manufacturing, where the PMI fell to 49.9 in May from 51.4 in April. Surveyed firms indicated that the Middle East conflict and the Strait of Hormuz shipping restriction are pushing up energy, fuel, transport and raw material costs, and deepening supply‑chain disruptions. At the same time higher prices reduced consumer purchasing power and willingness to place new orders, especially in services.
PMI data therefore show that the euro‑area economy entered Q2 in a context of weakening activity, rising inflationary pressure and an increasingly difficult macro environment for ECB policy.
Industry slows, construction recovers losses, and weaker wages pressure the wage‑price index
April Polish economic data indicated a normalization of activity after a clear rebound in March (see MAKROpuls 21.05.2026). Industrial production rose 3.1% year‑over‑year versus 7.5% in March after a downward revision from 9.4%, below our forecast and consensus, and seasonally adjusted it fell 2.6% month‑over‑month.
The slowdown was partly due to a less favorable working‑day pattern, while industrial activity was supported by construction‑related sectors and still high production of supply goods, likely linked to inventory accumulation amid the ongoing Middle East conflict. Data from construction were markedly better than expected: construction‑and‑assembly production rose 4.5% year‑over‑year in April versus 0.6% in March, and seasonally adjusted it rose 3.4% month‑over‑month, confirming a rebound after winter activity weakening.
Labor market data had a more negative tone – employment in the enterprise sector fell 0.9% year‑over‑year, similar to March, while wage dynamics fell sharply to 5.4% year‑over‑year from 6.6%, and real wage‑fund dynamics slowed to 1.1% year‑over‑year from 2.6%, reaching the lowest level since July 2023.
In our view the last‑week data are consistent with our 2026 GDP growth forecast of 3.3% and reduce pressure for tightening monetary policy, supporting our forecast of stable NBP rates at least until the end of 2027.
Last week financial markets remained highly volatile and were largely shaped by U.S.–Iran conflict news.
At the start of the week the zloty was relatively stable, and bond yields fell slightly after news that President Trump had halted a planned attack on Iran, but on Tuesday a lack of progress in negotiations again increased risk aversion, pushing the EURPLN rate to around 4.25.
At the same time pressure on the domestic debt market remained under the influence of high oil prices, inflationary concerns and rising yields on base markets, and the 10‑year SPW yield temporarily exceeded 6%.
Sentiment reversed on Wednesday when oil price falls after more optimistic U.S.–Iran negotiation signals supported risk assets.
Thus in the second half of the week we observed a strengthening of the zloty and falling bond yields. This week the main market driver will remain the development of U.S.–Iran negotiations and their impact on oil prices.
Investor activity at the start of the week may be limited due to the U.S. holiday, but on the domestic market attention will be drawn to today’s Polish retail sales data, where the realization of our lower‑than‑consensus forecast would be negative for the zloty. Later in the week key data will be U.S. PCE inflation and preliminary Polish CPI readings.
Poland a runner‑up in EU agricultural and food export competitiveness
Polish agricultural and food exports rose to €58.5 bn in 2025 from €53.9 bn in 2024. At the same time imports rose to €38.6 bn from €35.9 bn, resulting in a trade surplus of about €19.9 bn, a record level. This reached 2.2% of GDP versus only 0.2% in 2004, indicating growing competitiveness of Polish agri‑food production. The following analysis verifies this hypothesis based on data.
First we examined trade balances of agri‑food items relative to GDP in EU countries. This ratio approximates export competitiveness. Data show that in 2025 Poland achieved the second highest result in the EU. The largest share of the surplus in GDP was recorded in the Netherlands (3.7%). However, the Netherlands’ result stems from relatively large agricultural production (mainly livestock and greenhouse crops) and significant re‑exports. Dutch specialization in re‑exports is aided by the largest European port (Rotterdam), through which a large share of EU agri‑food imports passes.
It is also worth noting that the group of countries with the largest agri‑food surplus relative to GDP is heterogeneous. It includes both old and new EU countries. However, it is dominated by relatively small countries with low population and relatively high agricultural intensity, such as Lithuania, Denmark, Hungary or Ireland. Poland and Spain are the only relatively large countries in this group.
Poland a leader in EU food export, but challenges ahead
In the second step we analyzed agri‑food trade balances relative to GDP in EU countries dynamically. They show that Poland joined a group of countries that improved their food export results most strongly. This group is much more homogeneous and dominated by new EU countries. Conversely, among countries that saw the strongest deterioration in export results were Ireland, Denmark, France, Germany and the previously mentioned Netherlands. These are countries that have long had strong agri‑food export advantages.
This suggests that agri‑food production generally concentrates in low‑cost countries. This aligns with decreasing economies of scale observed in the sector, which reward investment in places where production is not yet highly developed. Despite the growing surplus of Polish agri‑food exports relative to GDP in subsequent years, Polish exporters will face increasing cost pressure (mainly due to rising labor and energy costs) and growing competition from Mercosur and Ukraine (see AGROmap 13.03.2026). A significant threat to Polish export results is also regulatory pressure. An example is the ongoing revision of the TED (Tobacco Excise Directive), aimed at significantly raising tobacco excise in the EU.
Poland is one of the largest EU producers and exporters of tobacco products. The surplus in Polish tobacco trade in 2025 was €4.2 bn, representing 21.2% of the total surplus in Polish agri‑food trade. Considering the above factors, we see a high probability of a decline in the share of the surplus in agri‑food trade in Poland’s GDP in subsequent years.
