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2020/01/13 / Erste Group Research

Poland Weekly Focus | Bond market under pressure


Inflation to stay in focus this week, as final headline number and core inflation are due. Core inflation to land above 3.0% on back of rising services prices. Bond market should focus on inflation. Further upward movement on long end cannot be ruled out.

January 15 | Flash inflation to be confirmed. The flash inflation reading for December resulted in a heated discussion about the possible risks of inflation remaining on elevated levels throughout 2020. The figure arrived at 3.4% y/y (0.8% m/m), beating all market expectations. Surging food prices were the key factor behind such a strong increase of the headline figure. Moreover, services prices continue their upward trend. We expect the flash reading to be confirmed.

January 16 | Core inflation to land above 3.0%. Given the sharp increase of the headline inflation figure in December, we think that core inflation (excl. food and energy prices) will land above 3.0% for the first time since the end of 2011. We believe that core inflation will continue to increase due to rising pressure from the services sector.

Bond market drivers | Long end under pressure from inflation. Over the course of the week, we observed upward movement of Polish yields across all maturities, demonstrating growing market expectations for a rate hike due to a surge in inflation in December. The 10Y yield went significantly up and increased by 20bp. We think that the upward shift was driven both by local and core market factors.

The market began to price in a quarter-point increase of the target rate within a one-year horizon, as FRAs jumped to 1.8%. We think that increased pressure on yields will continue throughout 1Q20, as inflation is expected to increase further. However, as the central bank seems determined to keep rates stable, this might remove some of the pressure from the long end of the curve in 2H20, as inflation should begin to ease in mid-2020. We continue to see an increase of the 10Y yield, mirroring core market developments.

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General information

AuthorErste Group Research
Date2020/01/13
Languageen
Product nameCEE Country Update
Topic in focusMacro/ Fixed income
Economy in focusPoland
Currency in focusPolish Zloty
Sector in focus-
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