April inflation data from Statistics Poland reversed the trend seen in the previous month. This time, the CPI reading came in above both market consensus and our expectations.
According to the flash estimate from Statistics Poland, CPI inflation in Poland stood at 3.2% year-on-year in April. On a monthly basis, prices increased by 0.6%, mainly due to fuel prices. According to GUS, fuel prices fell by only 1.8% month-on-month, a smaller decline than retail market signals had suggested following the government’s introduction of the CPN programme.
Our preliminary forecasts point to a slight increase in core inflation, excluding food and energy prices, to 2.9% year-on-year, up from 2.7% in the previous month. At the flash-estimate stage, GUS does not provide a detailed breakdown of price changes, which makes it difficult to clearly identify the sources of this increase. However, we expect that higher core inflation may have been supported by transport services prices, which are closely linked to rising fuel costs.
We see a risk that annual CPI inflation could accelerate further in May and temporarily edge above 3.5%, the upper bound of the National Bank of Poland’s inflation target range. The NBP’s target is 2.5%, with a symmetrical tolerance band of ±1 percentage point. At the same time, we believe that any breach of this level would likely be temporary and largely driven by base effects.
In the following months, annual CPI inflation should decline, although another temporary increase in December cannot be ruled out, also due to base effects. In the coming weeks, the key factors shaping the CPI path will be the pace at which oil price changes are passed through to retail fuel prices. This process remains closely linked to developments in the Middle East and the future of the CPN programme.
Despite the slightly higher-than-expected preliminary inflation reading for April, we believe the Monetary Policy Council will remain in “wait-and-see” mode. This view is supported by the earlier downside surprise in March and by the expected inflation path for the rest of the year.
The latest rise in inflation appears to be largely the result of an external supply shock, mainly related to energy and fuel prices, over which monetary policy has limited influence. In such circumstances, the cost of “fighting” inflation through higher interest rates — in the form of weaker economic activity — could be relatively high.
In our view, there are currently no strong arguments for tightening monetary policy. Although the risk of CPI temporarily exceeding 3.5% has increased, inflation should remain within the NBP target range over the medium term.
At the same time, business sentiment data suggest that prolonged tensions in the Middle East increase the risk of slower GDP growth both in Poland and abroad. The MPC may, however, sharpen its rhetoric by highlighting inflation risks and uncertainty, which could translate into increased volatility in interest-rate market instruments.
