The last few weeks saw an unprecedented stream of positive news for Poland (Donald Tusk appointed president of the European Council, Mateusz Szczurek named best CEE finance minister, the volleyball team won the world championship and the football team beat Germany for the first time ever). However, the economy seems to be far less jubilant. Recently-released data confirmed that economic activity in Poland is slowing and that GDP growth in 3Q14 probably slid below 3%YoY. The deceleration in industrial production, construction output and retail sales in recent months was quite significant. On a positive note, the labour market is still improving (falling jobless rate, growing real labour income), which should support private consumption, and investment growth is probably still decent (no sign of weakness in corporate demand for investment loans, companies are hiring). We maintain our forecasts of 3.1% average GDP growth in 2014E and 2015E.
Meanwhile, inflation is falling further (-0.3%YoY in August) and will most likely remain below zero until year end, under pressure from low food and commodity prices and slower economic growth. The coming quarters should see a rebound in CPI growth, but a very gradual one, with inflation probably staying below the 2.5% official target until 2H16E.
The change in outlook for GDP and inflation led the Monetary Policy Council (MPC) to cut the lombard rate in October by 100bp (to 3.0%), the reference rate by 50bp (to 2.0%) and left the deposit rate unchanged (at 1.0%). It left the door open to further adjustment and, in our view, if the MPC decides to cut rates again in November, it will be 25bp. We stick to our forecast of a 1.75% reference rate at the end of the year.
Meanwhile, the financial markets are still expecting a more aggressive monetary policy adjustment ahead. Bond yields and IRS rates fell to new all-time lows, anticipating future rate cuts, and even recent comments by MPC members (not at all dovish, in our view), did not trigger a significant correction. Even though the market should remain supported by the ECB liquidity injection and the resulting hunt for yield, we think that a correction in the fixed income market is likely, if not in the next week or two (after slightly better-looking economic data), then after the next MPC meeting in early November.
The zloty remained extremely stable versus the euro, but weakened substantially against the dollar in September. We think the currency may hold steady in the near term and appreciate slightly in the medium run, although potential dollar appreciation in anticipation of Fed rate hikes adds risk to this view.