Polish Zloty: Import pass-through risks challenge cuts – BNY
BNY’s Geoff Yu argues that Euro strength is amplifying import price pass-through risks for Poland, with EUR/PLN gains feeding into higher import prices. The Monetary Policy Council’s guidance of unchanged rates contrasts with market pricing for a return above 4%.
BNY’s Chief Economist Geoff Yu contends that the euro’s strength is exacerbating import price pass-through risks for Poland, with gains in EUR/PLN leading to higher import costs. Despite the Central Bank of Poland (NBP) projecting no changes to interest rates for the remainder of the year, market expectations anticipate rates exceeding 4%.
Poland is perceived as having the most significant hawkish risk among Central and Eastern European nations, rendering any prospects for rate cuts increasingly uncertain. The overall scenario could have unforeseen repercussions. While a robust euro and reflation are typically advantageous, they may intensify inflation risks stemming from supply shocks in the short term.
Due to interconnected supply chain dynamics, the pass-through effect remains robust across Europe, and recent shifts in the euro are contributing to heightened hawkish risk in policy assessments. Poland has not experienced the "re-rating shock" observed in Hungary, which generated policy-neutral inflows. Between March and May, import prices in Poland witnessed a noticeable increase even without substantial gains in EUR/PLN.
The potential for additional gains through Q3 appears more likely, given the significant EUR/PLN gains. The current policy framework encounters challenges, as the NBP anticipates no interest rate adjustments for the rest of the year. However, forward pricing suggests that rates need to surpass 4%. The NBP's ability to accommodate a precautionary rate hike in June is feasible, but a more sustained cycle may necessitate a catch-up.
Meanwhile, fiscal stimulus remains robust, which could augment domestic demand, a factor that is detrimental in an environment with rising import prices. At the very least, the consideration of rate cuts should be excluded. In light of these circumstances, heightened vigilance is required from the NBP and Riksbank. Polish rate cuts should be excluded from consideration, with an emphasis on earlier tightening by the Riksbank.
Furthermore, the prospect of further EUR/PLN and EUR/SEK appreciation is considered increasingly self-limiting.
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