BZ WBK Rates and FX Outlook - November 2015
In November Rates and FX Outlook:
- The conservative Law and Justice (PiS) won the general elections with 37.8% of the votes and an outright majority in both the Sejm (235 out of 460 seats) and the Senate (61 out of 100), which means it is able to form a government without a coalition partner (the first such case in Poland's post-communist history). We expect the new government (led by Beata Szydło as the new Prime Minister) to be formed by the end of November. PiS would like to name the cabinet as soon as possible, as it would like to propose an amendment to the 2016 budget to include some of its pre-election proposals.
- Our knowledge about PiS' post-election programme is still quite limited, as we are waiting for the new government's line-up and announcement of its plans. However, we see a risk of an expansionary policy mix. PiS officials pledged to use all available monetary and fiscal policy tools to boost GDP growth towards 5%-6%. They declared, among other things, that there is still room to cut interest rate cuts by 25-50bp and revealed that willingness to cut rates will be among the criteria used to choose candidates to join the central bank's Monetary Policy Council. We currently believe interest rates are indeed likely to be cut by 50bp at the start of 2016. Inflation will probably be above zero by then and trending upwards, while GDP growth should hold steady above 3%. Thus, if the new MPC wanted to trim borrowing costs, the best strategy would probably be to do it as soon as possible, to (try to) avoid the impression that it is a pro-cyclical move. By the time the February MPC meeting takes place, there will be five new MPC members (plus two designated by PiS president L.Kaczyński, who suddenly became more dovish in recent months). Meanwhile, the FRA market is pricing-in a 50bp cut over the next nine months, so we see scope for a decline at the very short end of the curve.
- We also see a risk of fiscal policy being effectively loosened (at least in the short term) if the government aims to deliver its key election promises (incl. a PLN500 monthly child allowance, costing the budget c.PLN20bn a year) and party's ambitious assumptions about much higher tax collection do not materialise. On balance, this may be positive for economic growth in the short run, in our view, bit it could lead to higher economic imbalances and more volatile growth in the longer term. The EU may force a tightening of fiscal policy in the following years if the deficit is heading for more than 3% of GDP, and interest rates may have to rise after several quarters if inflation's upward trend is strengthened by policies aimed at stimulating demand and by retailers passing on a new supermarket tax to customers.
- We think such a scenario calls for a steeper yield curve in 2016. The main risk for the zloty is connected with the issue of converting FX loans and ideas to amend the NBP charter. As we do not think those will be top priorities for the cabinet in the first few months, we think that global factors will dominate and should support the zloty. For 2016, we see a risk of a higher EUR/PLN, as the new government is likely to start implementing some of its more controversial policy measures.
RATES AND FX OUTLOOK - POLISH FINANCIAL MARKETS