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The National Bank of Poland (NBP) is not expected to adopt any tightening in its monetary policy over the coming year, owing to a below-target inflation level in the economy, according to the latest research report from Commerzbank.
On February 23, PiS leader Jaroslaw Kaczynski proposed large fiscal programmes, which rattled the markets and led to a sell-off in bonds and modest appreciation of the zloty. Many market commentators understand the timing of this announcement in light of the upcoming elections in October-November.
Finance Minister Teresa Czerwinska has suggested that the 2019 Budget will, in reality, not need to be significantly amended. Nevertheless, the proposal gave ammunition to MPC hawks, who relaunched the topic of rate hikes by the end of the year, the report added.
This is not a majority view of course, but a modest 12bp of rate hike appears to have got priced in by the market. To put things in perspective, the Polish fiscal deficit is currently around 1 percent of GDP; meanwhile, the economy is showing signs of slowing down considerably on the back of weak German demand.
"Indeed, our view is that Kaczynski had to come up with this plan ahead of elections because the economy was beginning to slow down at the most inopportune time for him. While government spending can partly offset the downturn, in our view, the spending will be undertaken against a weak demand backdrop, and is unlikely to create overheating or inflation overshoot," Commerzbank further commented.
