BZ WBK Rates and FX Outlook - August 2015
In August Rates and FX Outlook:
- The Polish economy is still in an expansionary phase and, if we exclude statistical noise (e.g. the impact of changes in working days), we see activity accelerating consistently and expect this trend to continue. The flash estimate of 2Q GDP growth will be released in the middle of August and we expect it to show a similar result to 1Q (3.6% YoY increase). The growth is still driven, in our view, by almost all the possible engines: solid investment and consumption growth and reviving exports, with a (cyclical) decrease in inventories being the only drag. We maintain our forecast of 3.8% 2015 GDP expansion, with growth likely to approach 4% in 4Q15E. The median market forecast is gradually converging towards our estimates. Economic growth in Europe continues to foster a positive environment for Polish exporters, especially as the exchange rate remains at a highly competitive level.
- Deflation has halved in the last five months, going from -1.6% YoY in February to -0.8% YoY in June. The rebound is a bit slower than we had anticipated, but we expect the trend to continue and think that CPI growth is likely to turn positive by November, ending this year at c.0.5% YoY, and moving towards 2% YoY by the end of 2016E.
- A continuation of decent economic growth, tightening of the labour market (jobless rate likely to approach all-time lows next year) and an inflation rate slowly approaching the target would justify, in our view, a start of monetary policy normalisation at the end of 2016. Meanwhile, the IMF recently said Poland may need additional monetary easing if inflation expectations continue to disappoint. There is also a lot of uncertainty about the composition of the new MPC, which will decide on monetary policy in 2016 (eight of the nine members will be replaced at the start of 2016 and the central bank governor’s tenure ends in mid-2016). The opposition Law and Justice (PiS) party, which is leading opinion polls ahead of the October general election, declares it would expect the central bank to actively support the economy, which clearly indicates the type of central banker it prefers. This generates a risk of stable interest rates for a longer time.
- The short end of the yield curve is no longer pricing in any rate hikes in 2016 and the FRA rates even imply a c40% chance of a rate cut in six to nine months. We think the market perception may change later this year, after inflation turns positive and GDP growth accelerates. However, in the next few weeks we expect range-trading in a horizontal trend, as the macroeconomic data should again be a mixed bag and liquidity is likely to be muted during the holiday season.
- The zloty has regained some ground now that the risk of Grexit has decreased. However, we think there are still several risk factors on the horizon, so August –as in previous years– is more likely to see a rise than a fall of the EUR/PLN. We expect the zloty to strengthen later this year, supported by an improving internal and external macro outlook.