BZ WBK Rates and FX Outlook - June 2015
In June Rates and FX Outlook:
- Poland's economy started 2015 on a solid note, with GDP growth accelerating to 3.6%YoY in 1Q15, fuelled by strong private consumption, accelerating exports, and buoyant fixed investments. Although a few high-frequency indicators (April production and retail sales, May PMI) disappointed recently, we still believe that economic growth will continue to speed up towards 4% at the end of the year. We still see no reason for the Euro zone's recovery to be derailed, so external demand should keep growing (especially when the zloty exchange rate is still competitive). At the same time, both consumption and investment growth are likely to remain strong, supported by record low interest rates and low commodity prices. After 1Q15 data we raised our 2015 GDP forecast again, this time to 3.8%.
- With economic growth increasing and inflation bottoming out (the CPI fell 1.1%YoY in May and we expect it to rise to 0.7%YoY by December) we do not expect monetary policy parameters to change in the near future. We think it is highly likely that the Monetary Policy Council (MPC) will keep interest rates on hold until the end of its term of office (i.e. early 2016). It is hard to speculate at this point on the line-up of the new rate-setting panel, as the result of the general election in October is now unclear. The surprising victory of the opposition candidate Andrzej Duda, who ousted the incumbent Bronisław Komorowski in May's presidential election, points to a significant risk of major changes on the Polish political scene.
- Uncertainty was the name of the game on the financial markets in recent weeks. Polish assets were negatively affected by several risk factors, including rising concern about Greece leaving the euro, as the deadline for a bailout agreement approached without any visible progress in negotiations, and the unexpected result of the presidential election, which raised questions about the future political situation in Poland. Yields of Polish bonds have surged in the last few weeks and the spread versus German Bunds rose to its highest since mid-2014. Such levels may seem attractive, especially if core Euro zone bonds keep strengthening in the nearest weeks amid a substantial demand-supply imbalance. However, the room for a Polish debt market recovery is likely to be limited by continuing concern about Greece and a higher risk premium, due to political uncertainty. Domestic macro data look likely to be unsupportive for bonds, as, despite several recent disappointments, we expect to see a continuation of decent GDP growth and an upward inflation trend.
- The worries about Greece that pushed EUR/PLN higher in recent weeks are likely to remain the key factor preventing a zloty appreciation in June, as the risk of Grexit is rising, in our view. Domestic political uncertainty is now a further negative factor. However, faster economic growth should help the Polish currency to strengthen at the end of the year.