Poland’s wage growth deceleration strengthens view of renewed rate cutting cycle later in 2016

Poland’s wage growth in the first quarter of 2016 slowed to 3.1% y/y from 3.2% y/y in the fourth quarter of 2015. This is consistent with the CPI inflation rate of -1.1% y/y and continues to give a dovish view on the economy. However, falling jobless rates and reasonable wage growth rates have not turned into wider inflation pressure in CEE. Any high inflation seen in the CEE region is expected to be due to the past depreciation of FX rather than solid domestic demand.

Nonetheless, rising wage growth and tightening labor markets have been frequently cited as inflation risk’s sources by central banks. This is especially true for the National Bank of Poland. Therefore, wage growth slowdown bolsters the view than the central bank will begin with its rate cutting cycle again later in 2016, said Commerzbank in a research note.

Meanwhile, the EUR/PLN pair has dropped from its early January’s high of 4.51 as worries regarding an immediate reduction of interest rate waned. The National Bank of Poland kept its policy rate unchanged at 1.5% in April in spite of having new members in its Monetary Policy Council. However, the proposed new central bank Governor might shift towards easing policy later in 2016. The central bank’s focus is expected to remain in the “fall-out from the current constitutional crisis” in the near term that has increased Poland’s political risk, noted Lloyds Bank in a research report.

Moodys has already showed its worries in April, following S&P’s unexpected downgrade in January. There is a risk that Fitch and Moodys both might undertake similar actions. These problems indicate that there are upside risks to the EUR/PLN forecasts in the months to come, added Lloyds Bank.