20170111-法国巴黎银行-Polish_inflation__Up_to_the_target_17页_1mb

Polish Inflation: Up to the Target

Core Content Summary

This report by Michal Dybula, Chief Economist at Bank BGZ BNP Paribas SA, provides an analysis of Polish inflation trends in early 2017 and forecasts for the year ahead. It outlines the factors driving inflation, the role of monetary policy, and the implications of rising prices on the economy.

Main Points

• Headline Inflation Surpasses Target: December 2016 CPI data showed a significant upward surprise, with inflation rising to 0.8% y/y from 0% in November. The report forecasts that CPI inflation will reach the central bank's target of 2.5% in Q1 2017 and remain stable around that level for most of the year.

• Core Inflation Accelerates: Core inflation, which excludes volatile items like energy and food, is expected to rise steadily. It is projected to be around 0.5% y/y in early 2017, adding about 0.3pp to the CPI. The acceleration is attributed to stronger consumer demand, supported by a tight labor market and increased social benefits.

• Fuel and Energy Prices as Key Drivers: Fuel prices are expected to be a major contributor to inflation in early 2017. The report forecasts that fuel inflation could reach 20-25% y/y in PLN terms, adding approximately 1.0-1.3pp to annual CPI. Non-fuel energy prices, including electricity and natural gas, are also rising, with the electricity tariff hike expected to add 0.1-0.2pp to CPI inflation.

• Food Inflation on the Rise: Food inflation is expected to increase significantly, reaching around 3% y/y in H1 2017, compared to 1.2% in November 2016. Meat, dairy, and sugar prices are pushing this trend, contributing over 0.7pp to headline inflation.

• Impact of the Zloty Weakening: A weaker zloty is expected to increase import costs, further contributing to inflationary pressures. This could lead to higher producer prices (PPI), which are currently at 3.1% y/y in December 2016 and are projected to rise further in 2017.

• Monetary Policy Outlook: In the base case scenario, the Monetary Policy Council (MPC) is expected to keep interest rates unchanged in 2017 due to soft economic growth and core inflation lagging behind headline CPI. However, if inflation rises above the target or the zloty continues to weaken, the MPC may consider tightening policy by mid-year.

• Risk Scenario: In a risk scenario, the report suggests that the MPC might raise interest rates by 50-100bp in Q2 and Q3 2017, especially if inflation exceeds expectations or market volatility increases. This would be a response to maintain price stability and economic growth.

• Market Expectations: Even if the MPC does not act, rising inflation is likely to increase market expectations for rate hikes, especially as CPI approaches the 2.5% target in early 2017.

Key Information

• Forecasted CPI Inflation: The report revises the 2017 average CPI inflation forecast from 1.9% to 2.5%, aligning with the central bank's target.

• CPI Components:

  • Fuel prices: Expected to add 1.0-1.3pp to CPI in early 2017.
  • Non-fuel energy: Expected to add 0.3pp to headline inflation over the year.
  • Food: Projected to contribute around 0.7pp to CPI.

• PPI Trends: PPI is leading CPI by about two months, with current prints at 1.7% y/y in November 2016 and expected to rise to 3.7% y/y in January 2017. PPI inflation is forecasted to top 5% y/y by the end of 2017.

• Retail Gas Price Cut: A 7% cut in retail gas prices in early January 2017 is expected to reduce CPI inflation by 0.1-0.2pp, but this is likely to be temporary due to rising wholesale prices.

• Inflation Risks: The report highlights that inflation risks are tilted to the upside, driven by a higher CPI starting point, high energy prices, and potential further depreciation of the zloty.

Conclusion

Polish inflation is expected to rise sharply in early 2017, driven by fuel and energy price increases, as well as higher food inflation. While the MPC is likely to keep interest rates unchanged in the base case, rising inflation and market volatility could prompt tighter monetary policy by mid-year. The report underscores the importance of monitoring inflationary pressures and their potential impact on the economy and monetary policy decisions.