Rate cuts now look unlikely unless the economy slows
Polish Economy and Financial Markets.
In April MACROscope:
There have been no major changes to the economic growth scenario after the first quarter. Most of the data confirmed that first quarter GDP is likely to exceed 3% again, although we see a slight slowdown vs the very strong 4Q15 (c4%). We expect industrial output and retail sales to be strong again (our forecasts are above market consensus). The very low reading of CPI inflation for March (-0.9%) confirmed deflation is likely to continue until 4Q16. In the medium-term, fiscal policy might be an important driver of inflation. Last month politicians mentioned the possibility of abandoning a planned VAT rate cut in 2017 or introducing an additional fuel charge. This was not confirmed, but it is worth remembering that such policy changes were not included in the central bank's (NBP) inflation projection.
The current no-inflation environment appears not to worry the Monetary Policy Council (MPC) and it is quite clear that new council members are focusing on a continuation of policy. They look willing to accept a deviation of CPI from the target until 2018. As we wrote last month, if the new projection did not persuade the council to cut rates in March, we would not expect it to change its mind in the following months. The April decision to keep rates on hold was probably unanimous and the council did not get any closer to monetary easing, as NBP Governor Marek Belka stated. The council treats the target very flexibly, in line with the Monetary Policy Guidelines. What is interesting is that Belka said that a possibility of adjusting rates more significantly in one shot (not via a series of smaller changes) was one of the MPC's discussion topics in April. Still, this is purely theoretical at this stage and the bottom line, after the MPC meeting, is: do not expect a rate cut in Poland in the next few months. We think any change in rates could happen in autumn and only if there is an economic slowdown (driven by global factors) or a significant strengthening of the zloty (which we do not expect).
As regards government policy, there are still a lot of uncertainties. Although the general government deficit for 2015 (2.5% of GDP) was a positive surprise, keeping it below 3% of GDP in the medium-term will be a challenge. In April, the government is due to approve the new version of the Convergence Programme. Still, we do not see this document as a game changer and the key to assessing the fiscal plan will be the 2017 budget. Significantly, the Polish government recently signalled it may backtrack on some of its proposals (a gradual and selective approach to tax free income and a lower retirement age that is conditional on a minimum number of years of paid contributions). However, the CHF-denominated loans issue is still a factor to watch closely. The central bank gave its estimate of the consequences of the president's proposal (cPLN40bn) and the Polish Financial Supervision Authority (KNF) released a report with an even higher estimate of the cost (cPLN67bn). This might suggest that the higher the cost, the lower the chances of the proposal being implemented. However, in recent weeks Polish media reported a number of comments from government officials (including PM Beata Szydło) questioning the quality of the KNF report and suggesting that the regulator will have to prepare another version. The Financial Stability Committee is scheduled to meet on April 18 to discuss the issue. It seems, therefore, that work on the proposal will continue and it is hard to guess what will emerge or when. All these factors will be important for the market as well as for Moody's decision on Poland's sovereign outlook/rating in mid-May.