There is still ammo, but no will to pull the trigger.
Polish Economy and Financial Markets.
In March MACROscope:
Economic growth in Poland remains solid: it accelerated to 3.9% y/y in 4Q15 and, in our view, should remain close to 3.5% in 2016E. Private consumption is likely to be the main driver of growth in the coming quarters, supported by healthy labour income and new child benefits (the new government’s 500+ plan). Meanwhile, fixed investment growth could decelerate (due to lower public spending and a more cautious mood in the private sector), and the continuation of rapid export growth could be under threat if Euro zone growth weakens. Uncertainty about the global economic outlook has been growing and currently seems to be the biggest threat for Poland’s growth outlook. The risk of Brexit (which we discuss in more detail on pages 2-3) is making the economic outlook even more uncertain. The OECD recently trimmed its world GDP forecasts, and the IMF has signalled it may do the same in its April edition of the World Economic Outlook. If those trends continue, it could negatively affect demand for Polish goods and services, limiting economic growth.
The replacement of the Monetary Policy Council (MPC) members is almost complete (see page 7 for a description of the new council members). The new MPC decided to keep interest rates on hold at its March meeting, even though the latest central bank projection showed that inflation may not return to target until the end of 2018, and despite the European Central Bank deciding to ease monetary policy more than expected only the day before. The Polish central bank apparently wants to ‘save ammo’ for unforeseeable events. In our opinion, two factors that could trigger a monetary policy change in the future are: (1) a significant slowdown of the economy; and (2) a large inflow of portfolio capital on the Polish market (sharp zloty appreciation). As we continue to expect solid GDP growth and see rather limited room for further zloty appreciation, we do not expect the MPC to change its stance in the coming months. The next National Bank of Poland (NBP) projection will be available in July, when Marek Belka will be replaced by the new NBP Governor (most likely Adam Glapiński). However, since the projection was not important for the Council this time round and most of new members are reluctant to change their policy stance, we do not think this factor should be a game changer later this year.
The zloty and Polish bonds have gained substantially in recent weeks, as the markets were anticipating substantial monetary policy easing by the ECB, and the fiscal and political risk in Poland has moved into the background. We think that the pace of zloty appreciation may be hard to maintain as sentiment in the global market remains volatile, so EUR/PLN could stay around 4.25-4.35 at the turn of the quarters. As regards the debt market, we think that expectations for interest rate cuts in Poland should weaken, but the short end of the yield curve should be supported by banks’ demand (bank tax issue). As regards the belly and long end of the curve, we see scope for further tightening of the spread vs the German Bund, especially if the ‘risk-on’ mood dominates after the ECB and FOMC meetings.