Polish Zloty:1-3 Month Outlook

Poland's headline inflation increased to -0.8% in June from  -0.9% in previous month. In its Financial Stability Report - July 2015, NBP cited that this deflationary environment is rather transitory, attributing it to lower energy and food prices and lower inflation in the Euro area. RBC Capital Markets notes the NBP statement in its press release from the July MPC meeting, "the annual price growth will remain negative in the coming months, mainly due to the earlier sharp fall in commodity prices." 

EUR/PLN is expected to reach 4.10 by the end of Q3 on the back of inflation, therefore, no more cuts in the key rate ie expected, and interest rate differentials between Poland and EU's local fixed income markets. 

RBC Capital expects the followoing situations to prevail in the economy. 

• First, headline inflation has continued to rise since February, and recent deflationary pressures are seemed to be transitory. Additionally, consumer inflation expectations for the next 12 months appear to have bottomed at 0.18% y/y. 
  
  
• Second, NBP is not likely to cut its key rate in the short term, which supports expectation for EUR/PLN lower. Deflationary pressures are transitory. Economic growth for Q1 was solid. Lastly, EUR/PLN has remained well above 4.10 since May. Given that inflation is at -0.8% and the key rate is at 1.50%, this implies ex-post real rates at +2.3%. 
  
  
• Third, given that NBP may have ended its easing cycle, while ECB is still easing, interest rate differentials between Poland and EU's local fixed income is expected to attract investors to Poland. This may support PLN strengthening against the EUR.