Will National Bank of Poland follow Hungary into cutting interest rates?

Disappointing macroeconomic data from Poland released in the last two days has increased concerns that the National Bank of Poland may follow Hungary into eventually cutting its interest rates. Hence the zloty has been underperforming its PEERs this week, despite the positive sentiment on the risky asset market.

Data released last week showed poor industrial output for March. The y/y industrial growth of only 0.5% is not consistent with the improving business sentiment indices (PMI) in Europe or in Poland itself. Retail sales disappointed somewhat, as their nominal y/y growth decelerated to 0.8%. 

That said, given the highly negative inflation, the real rise in retail sales is still around 3%, which is no disaster; moreover, household consumption will start being increasingly encouraged by increased child benefits this year. Polish economic outlook continues to be positive, according to KBC Market Research. The economy is likely to attract further support from policy measures of new government, apart from a weaker zloty and low interest rates. 

Gross domestic product expanded faster than 3 percent in 2014 and 2015, and the central bank now forecasts the economy will add 3.8 percent this year and next. The central bank is likely to keep more weight on GDP growth than inflation, especially in the global environment of disinflation and sluggish economies.

“For the whole year 2016 we expect GDP growth may reach 3.5 - 4.0 percent”, said KBC Market Research.

Poland’s central bank at its meeting on April 6th has kept its benchmark rate on hold at a record low 1.5 per cent for the 13th consecutive month. A stronger zloty, “inflows of cheap euros from the ECB” and current deflation is likely to keep the NBP on hold at its May policy  meeting. If the currency appreciates further, the NBP will have a leeway to loosen its monetary policy in Q2 2016. Emerging market sentiment and the Fed or the ECB policy actions will mainly drive the zloty. 

"Despite the poor data, we do not currently believe that the NBP will want to cut rates in the months to come. Nonetheless, if the poor data also persist next month and the zloty remains relatively strong until then, the risk of a rate cut by the NBP will rapidly increase." added KBC Market Research.