April 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 reached 3.2% year-on-year in April. On a monthly basis, prices rose by 0.6%, mainly due to fuel prices, which, according to the statistics office, fell by only 1.8% compared with March. This decline was weaker than signals from the retail market had suggested after the government introduced 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 from 2.7% in the previous month. At the flash estimate stage, Statistics Poland does not provide a detailed breakdown of price changes, which makes it impossible to clearly identify the sources of this increase. However, we expect that the higher core inflation reading may have been supported, among other factors, by transport service prices, which are closely linked to rising fuel costs.
We see a risk that annual CPI inflation may accelerate further in May and temporarily exceed 3.5%, the upper limit of acceptable deviations from the National Bank of Poland’s inflation target of 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. The key factors for the CPI path in the coming weeks will be those determining the pace at which changes in oil prices are passed through to retail fuel prices. These remain 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 that the Monetary Policy Council will remain in “wait and see” mode, taking into account the earlier downside surprise in March and the projected inflation path for the rest of the year.
The latest increase in inflation is largely the result of an external supply shock related to energy and fuel, over which monetary policy has limited influence. In such circumstances, the cost of “fighting” inflation through interest rate hikes, in the form of weaker economic activity, could be relatively high. In our view, there are currently no strong grounds for tightening monetary policy.
Although the risk of CPI inflation temporarily staying above 3.5% has increased, in the medium term it should remain within the National Bank of Poland’s target range. In addition, as business sentiment surveys suggest, prolonged tensions in the Middle East increase the risk of slower GDP growth both in Poland and abroad.
The Monetary Policy Council may, however, sharpen its rhetoric by emphasizing inflation risks and uncertainty. This, in turn, could lead to increased volatility in the pricing of interest rate market instruments.
