In July, Poland's inflation continued to creep upward while remaining deep in deflation at -0.7% y/y, compared with -0.8% in June (Figure 1). Food (-1.7% y/y) and energy (-2.9% y/y) deflation are keeping headline inflation below zero. In addition, core inflation remains quite low at 0.4% y/y in July). Headline inflation declined m/m by -0.1% in July due to sharp declines in food and clothing and footwear prices. On the other side, there were increases in health, transport, fuel, communication and recreation costs. These were mostly in line with seasonal patterns.
During the remainder of 2015, deflation is likely to persist. Inflation will likely continue to rise gradually but not punch into positive territory until late 2015 or Q1 16. Base effects then take over, making it likely that in H1 16 inflation will push higher and in H2 break into the bottom range of the 1.5-3.5% target. What happens from there depends on global commodity price developments and domestic production trends as spare capacity will likely have been used up. There are some upside risks to food inflation due to the drought conditions this summer in Poland. Meanwhile, growth remains resilient.
The continuing deflation causes the policy rate at 1.5% to appear elevated. The MPC has indicated it does not intend to lower rates further, but will wait until the new MPC takes over when 8 of 9 of the committee members' terms run out in January and February 2016. The tenth member, Governor Belka's term expires in June 2016 (he can be reappointed, while regular committee members cannot). Inflation and monetary policy issues are secondary in Poland with the upcoming parliamentary elections on 25 October. Polls indicate that the opposition PiS will head either a single party or coalition government. This could lead to substantial economic policy changes, and it would put PiS in a position to make most, if not all, the MPC appointments.
"Nevertheless, the PLN could remain stable relative to the rest of EM FX given its relative safe-haven status and that the PLN has already sold off somewhat, apparently pricing in some of the political uncertainty", says Barclays.
