Relative Currency Strength: A 'Virtuous Circle'

The National Bank of Poland (NBP) initiated a long-awaited tightening cycle yesterday, as March inflation of 2.5% y-o-y hit the central bank's inflation target. We are more cautious on the speed of hikes than market consensus, given a re-weighting of the consumer basket, and a much more favourable CPI base for comparison in H206 than H106. We would also emphasise large zloty gains against the dollar, which are helping to ease oil-related import price pressures in the inflation outlook, while more limited gains against the euro should help maintain export competitiveness, amid something of a 'virtuous circle' for the Polish economy. Looking into the medium term, we believe further limited upside against the euro is ahead in the run-up to eventual ERM-II entry, and a sustained push through PLN3.7500/EUR in coming months should set the scene for a move as far as PLN3.6000/EUR.

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