We have now updated our thoughts on PLN for the 2nd half of the year. These are below:
The zloty has definitively outperformed our expectations so far in 2017, gaining 4% against the euro. Growth in Poland has been strong and the labour market has dragged unemployment down from 8.6% in February to 7.6% in June. Wage pressures have also pleasantly surprised and with inflation subdued, we would hazard a guess that a decent proportion of the rise in the zloty has come from an increased desire to hold Polish government bonds.
So far the National Bank of Poland seems very happy to continue to sit on its hands as far as interest rate movements go. Rafal Sura, a member of the Monetary Policy Council summed up the mood nicely by telling markets that “If inflation is around 2% and the Polish economy expands in current or similar place, then there is no reason for increasing interest rates in the next three to four quarters.”
These predictions outline the high, low, median and mean expectations for the above currency pair as found by a Bloomberg survey of banks and brokers and should only be used for illustrative purposes. Source: Bloomberg
Certainly predictions markets are expecting EURPLN to remain rooted around 4.2 for the foreseeable future with dips towards 4.10 more than likely.
Conclusion: EURPLN could pop as high as 4.30 in the coming few months but a dip to 4.10 is more likely.
Poland will be glad to see the back of 2016 but a meteoric rebound in the coming 12 months is unlikely in our eyes. Investment spending is weak and an uncertain tax outlook and a drop in funds from the EU are likely to exacerbate this weakness through 2017. Consumption spending however will be the main driver of GDP and wage growth should continue to improve as unemployment continues to plumb record lows.
Unfortunately, those wage increases are going to have to battle with a definitive increase in inflationary pressures in 2017. Some of this is coming from a pick-up in commodity prices whilst the weak zloty and rising prices in the Eurozone are also bringing imported inflation higher.
This points to a period of ‘stagflation’ – stagnant economic output and high inflation – and we expect that this will keep the National Bank of Poland on hold through 2017 with communications likely to err on the dovish side. This could easily lead to markets wishing to continue selling PLN through the early part of the year as possible rate cuts are priced in.