Significant upside risk to Poland's inflation could prompt rate hike discussions at end-2017

The Monetary Policy Council of the National Bank of Poland (NBP) maintained interest rate at a record low 1.50 percent on Wednesday, as widely expected. The lombard rate was retained at 2.50 percent and the deposit rate at 0.50 percent. The rediscount rate was kept unchanged at 1.75 percent.

The monetary policy committee raised its real GDP outlook to 4.1 percent from 3.7 percent in 2017 and also sees higher growth of 3.55 percent and 3.3 percent respectively in 2018-19. The inflation trajectory was marginally lowered and the central bank now expects inflation only to reach the 2.5 percent target in 2019.

However, analysts at Danske Bank think the NBP is too relaxed about the inflation outlook. Danske Bank notes that the combination of accommodative monetary, EU investment and fiscal policies in an economy close to full employment will lead to significant labour shortages and hence upward pressure on wages and consequently core inflation.

"We see a significant chance that inflation will reach the 2.5% target already in mid-2018. Hence the rate hike discussion will gain prominence in late 2017 already, being a supportive factor for the PLN in H2 17 given the relatively soft market pricing of the NBP rate trajectory," said Danske Bank in a report.

It was also interesting to note signs of divide among the MPC members about the accommodative monetary policy stance. MPC hawks expressed concern about the real interest rate staying too low or negative for too long; they also warned that NBP may have to hike rates if inflation were to accelerate. Governor Adam Glapinski however opined that there was no major risk of bubbles developing; and he expressed his view that rates will stay low for an extended period.

"The headline inflation rate is set to breach the central bank's target in early-2018, which should be enough to persuade some of the currently dovish members on the MPC to vote for an interest rate hike. The MPC is likely to start tightening policy next year and interest rate hikes will ultimately be larger than the markets currently anticipate," said Liam Carson, an economist at Capital Economics.

The Zloty fell to an 8-day low of 3.7564 against the greenback on Wednesday after the central bank stood pat. USD/PLN was trading at 3.7335 on Thursday at around 1145 GMT. EUR/PLN was up 0.5 percent at the time of writing, trading around 4.2498.

FxWirePro's Hourly USD Spot Index was at 77.9111 (Slightly bullish), while Hourly EUR Spot Index was at -2.60263 (Neutral) at 1145 GMT. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex.

FxWirePro launches Absolute Return Managed Program. For more details, visit http://www.fxwirepro.com/invest