As expected the Monetary Policy Council left rates flat and remained dovish. The post-meeting comment downplayed the recent rise in CPI and core inflation. We expect flat rates in the coming quarters, despite our expectations of CPI rising above the upper ceiling (3.5% year on year) in 1Q20 and staying above the target (2.5% YoY) for many quarters.
MPC downplays the rise in CPI
Despite the substantial rise in December CPI, particularly in the core component (moving from 2.6 to 3.2% YoY), the post-meeting comments by the MPC were very dovish. The National Bank of Poland governor even repeated his forward guidance on flat rates till 2022. The statement says that core inflation for December 2019 remains at a “moderate” level. This statement is quite surprising given that core CPI is above the NBP target set for CPI (so the measure also encompasses other inflationary factors). Much emphasis was also placed on food and fuel prices.
The Council continues to believe that after a temporary spike in 1Q20 CPI should return towards the NBP target. Chairman A.Glapiński underlined that neither he nor the Council believe that CPI will exceed 4% YoY in early 2020 (INGF 4.5% in 1Q20) and remain at an elevated level for a prolonged time (INGF 2020 average 3.6% YoY). In his view, second-round effects will not take place, as the economy slows. The Council should also not respond to supply-side shocks. However, we see a reasonably strong transition of mounting wage, electricity costs, etc for corporates on retail prices. This effect should amplify further during the year, eg, due to a massive minimum wage hike.
New CPI projection only slightly higher
Chairman Glapiński expects that the new NBP projection (to be released in March 2020) of CPI will be revised upwards, but only slightly. In November the central bank proposed a flat path of core inflation for 2020 despite a massive rise in the minimum wage (15.6%), increasing costs of electricity for corporates, etc. In November the NBP assumed CPI to peak at around 3.5% YoY in 1Q, which is around the upper band of the inflation target. However, we expect CPI to breach this level in 1Q20 and peak at about 4.5% YoY in 1Q20. Also, later into the year, we anticipate rising core inflation to partially offset base effects on food prices. As a result, CPI should return to 3.5% YoY in 2Q-4Q20 rather than close to the target (2.5% YoY), as the NBP expects.
According to our estimates, in 2021 CPI should return to the range around the target, but should remain above the 2.5% YoY target. The new March 2020 NBP projections should show a lower CPI path. Moreover, the Council is likely to retain the view that much of the rise in prices should be attributed to temporary, regulatory, or external sources. Also, given the slowing domestic economy and risks to external growth, that should be enough to convince the majority of the MPC to hold rates flat.
C.Kochalski likely to join the doves camp
Personnel changes reinforce our view on flat rates too. In January C.Kochalski replaced A.Osiatyński in the Council. The comments he provided during the press conference confirm that Kochalski should join the doves camp. With that, we see only three MPC members who may think about a hike (K.Zubelewicz, Ł.Hardt, and E.Gatnar). Given Glapiński’s persistent anti-hike stance no less than six other members would need to support tightening.
The MPC stance may result in asset swap tightening. As inflation is set to spike in 1Q20 we expect a rise in PLN IRS rates across the curve – some investors are likely to anticipate that the MPC will finally surrender and tighten its policy. At the same time, we expect strong demand from local banks on cash bonds (Polish government bonds). The local banking sector remains over-liquid, facing limited credit demand and high deposits as households are saving a higher portion of new social transfers than in previous years. Given weak credit demand banks are forced to purchase POLGBs, which are additionally asset tax exempt.
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