WARSAW: Polish manufacturing slowed sharply last month, Markit Poland Manufacturing PMI index (PMI) fell to 51.0 last month from 53.8 in March, significantly short of the forecast in a Reuters poll of 53.2.
Despite manufacturing missing forecasts in the previous month, the momentum in the Polish economy is still relatively strong and analysts expect it to be boosted further by stronger consumer confidence with the kick-in of the child benefit scheme in June and a pickup in external demand. The EU commission yesterday (Tuesday, May 3rd) raised its growth forecasts for Poland to 3.7% in 2016 and 3.6% in 2017.
Inflation in Poland has been below 2.5 percent since December 2012 and below 1.5 percent since February 2013. The run of deflation that started in July 2014 is showing no signs of easing. However, given the strong growth in the economy and tight labour market, we think inflation pressures should start to build. As oil prices have recovered somewhat, the energy components of the CPI could drive inflation higher in coming months.
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, scheduled on Friday, 13th. If the currency appreciates further, the NBP will have a leeway to loosen its monetary policy. Emerging market sentiment and the Fed or the ECB policy actions will mainly drive the zloty.
After strengthening more than 5.5% against the euro since the slump in January, the zloty has weakened by almost 3.5% since April, underperforming emerging market currencies by a significant margin. Brexit issue could also increasingly weigh negatively on the zloty and other periphery currencies as the referendum draws closer.
Any change in the generally positive risk sentiment towards emerging market currencies could weaken the zloty. Worries that Moody’s may downgrade Poland’s credit rating in a review due on May 13th, has also weighed on the zloty in the past two weeks. But once we get past the UK referendum and a more modest Swiss franc loan conversion plan is pursued, the zloty will strengthen. The ECB is expected to continue to ease monetary policy this year, which is likely to drive fresh capital into CEE and create currency appreciation pressure.
