Economic Analysis - Aggressive Rate Hike Cycle Starting In 2018 - OCT 2017

BMI View: The National Bank of Poland (NBP) will keep rates on hold in 201 7 and start tightening in 2018. Poland ' s economy will grow rapidly in the quarters ahead , while the labour market is already extremely tight, a combination which will increasingly put upward pressure on core inflation.

We maintain our view that the National Bank of Poland (NBP) will keep its base rate unchanged at 1.50% in 2017 and start tightening in 2018. We expect inflationary pressures to continue building into 2018, which will force the NBP to hike rates gradually by a total of 100bps to 2.50% by the end of that year, placing us above Bloomberg consensus of 1.90%. Although core inflation which excludes food and energy remains relatively subdued, Poland's economy is firing on all cylinders, with real GDP growth accelerating to 4.1% in 2017 and 3.6% in 2018, according to our forecasts. Consumer and business sentiment indicators are approaching historic highs and Poland's labour market is extremely tight, which will keep upward pressure on wages.

In our view these factors will result in inflation accelerating to 2.2% by the end of 2017 and 2.5% in 2018, while averaging 1.5% and 2.4% in those years respectively. Furthermore, we highlight that headline inflation rebounded to 1.7% y-o-y in July despite on-going low energy prices, marking an end to disinflation of the past few months. Although inflation still remains well below its 2017 peak of 2.2% in February and this uptrend has yet to be confirmed by additional strong readings over the next few months, the recent uptick in price growth nevertheless suggests to us that despite subsiding supply-side pressures, demand-side inflationary pressures are increasingly building. As a result, we expect core inflation to accelerate over the coming month, after remaining below 1.0% in H117.

Uptick In Core Inflation To Trigger Monetary Tightening
Poland - Consumer Price Index
Source: NBP, BMI

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