Poland: Losing momentum

Economic activity indicators released over the past month have shown that the Polish economy is finally losing momentum. However, the data supported our view that economic slowdown this year will not be dramatic thanks to strong resilience of the domestic economy to recessionary tendencies in the Euro area.

Despite the economy finally starting to lose momentum, it is doing better than feared a few months ago. Thus, Polish central bankers has become more focused on inflation, which has been running above the target range for 14 months now and is not likely to drop below the upper end of the target range until the last two months of this year. In a very hawkish message after its policy meeting in early April, the Polish MPC suggested a rate hike could take place in the near term “unless signs of considerable economic weakening in Poland appear and the outlook for inflation returning to the target improves”.

We forecast that domestic macro data due for release in April will be dovish, confirming the economic slowdown is on the way and indicating that CPI inflation has entered the downward trend, following already started decline in core inflation. In our view this should prevent the MPC from policy tightening.

Dovish data should lead to a correction of the recent spike in market interest rates, which took place in reaction to more hawkish than expected message from the MPC.

At the same time, softer domestic data will be negative for the PLN. However, the key driver for the PLN is still the global risk perception, which has started to increase recently amid reviving concerns about the Euro area debt crisis. Thus, we expect the PLN to remain under pressure in the near term, before going stronger later in the year.

Piotr

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