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MACROscope - Polish Economy and Financial Markets

Summary:

Where Are We Now?

In January's MACROscope:

  • Since we released our 2016 outlook in early December, data have confirmed the strength of GDP and business climate indicators suggest growth is going to stay between 3.0% and 3.5% in the coming quarters. The latest balance of payments figures show 4Q15 might be even above this range (higher net export contribution). Despite high growth, where consumption may prove to be the star performer (thanks to looser fiscal policy), we have lowered our CPI forecast. Although the cut in energy and gas tariffs for households was not a surprise, it seems the inflationary impact of the drought on food prices was shorter-lived in reality than we expected (two months rather than four). Lower commodity prices will also lead to lower inflation across the universe. With the lower starting point, it is little wonder that deflation in 2016 will last longer and we now expect it to continue until September.

  • Last year, when the market priced-in some monetary policy easing (25-50bp) in the start of 2016, it was mostly due to the expected changes in Monetary Policy Council members (eight new members starting in 1Q16). At the turn of 2015-2016 expectations on rate cuts were scaled back. However, we think the new inflation outlook, which will be reflected in the central bank's projection in March, may support further monetary easing.

  • The Senate accepted three candidates to join the MPC members. The Sejm is due to accept another two at the end of January, so five of the seven 'old' decision-makers will still participate in the February meeting. One more candidate from Sejm and two from the President will be known in a few weeks and the central bank governor will change mid-year (there are no candidates yet). Not all new members are absolute beginners in monetary policy: among them is one who served five years on the central bank's board and an ex-advisor to the current governor. For others, however, monetary policy appears to be outside their sphere of professional interest.

  • In March all eight new members will be on board and, if they have a sense of doubt about deflation ending, the MPC might decide the time is right for a cut. After all, annual inflation rate has averaged zero for the last three years (vs a target of 2.5%) and 2016 could see a repetition. This is not America: the new MPC will be under pressure from the lack of inflation and market discussion may soon change from whether a new, politicised MPC will cut rates to 'what is the scope for monetary easing, given inflation well below the target for another year (or more)? All things considered, we still believe that the new MPC will be generally more dovish than the previous one. The case for rate cuts looks solid, but a factor that might shake it is a prolonged weakening of the Polish currency. So far, this year, while almost nothing has changed in the domestic economy, we have seen a significant weakening of the zloty, driven by further turbulence in China at the start of the year and S&P's decision to cut Poland's rating in mid-January. Please see page 6 for our detailed comment on the latter.

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Keywords: BZWBK, MACROscope, January

Author: Bank Zachodni WBK Price: Content is free of charge