Will inflation in Poland reverse the downward trend faster?

Although the mood on global markets has partially cooled in recent days, the Polish zloty did not feel the pressure from sellers. This is hardly surprising, considering the internal factors and the possible reversal of the disinflationary trend in the coming months.

Return to a higher VAT rate on food

The prospects for the Polish economy look solid this year, and the potentially longer restrictive level of interest rates in Poland than in the largest central banks helps the zloty. We will find out the MPC's decision today, although it is unlikely to be a surprise, rates will almost certainly remain unchanged. We may observe greater volatility in the zloty tomorrow, when the president NBP prof. Glapiński will comment on policy prospects, already knowing the updated inflation projections.

Following Prime Minister Donald Tusk's comments, it seems that the scenario of returning to the 5% VAT rate from April may be more likely than leaving 0% VAT on basic food products. What is somewhat disturbing is the announcement in which the Prime Minister stated that VAT could be restored to 0% at any time if there were justified reasons for doing so. Although this was not an official statement, it shows that in the following quarters and years we will continue to face high fiscal instability and, consequently, potentially limited 'predictability' of NBP decisions. This coincides with a generally uncertain period, also globally; when risks arise from geopolitical tensions affecting supply chains and supply conditions.

The position of the zloty is not at risk

The fact is, however, that food prices in Poland are falling for many reasons. Of course, the mere restoration of 5% VAT will not have to be equivalent to 'starting' another inflation spiral. However, higher VAT will probably burden demand only to a limited extent, because it will apply to basic products that consumers often cannot refuse for many reasons. What's more, the consumer in Poland is generally strong, wages are rising - it does not seem that 5% VAT will result in a serious reduction in demand. On the other hand, the government is working on extending protective measures for energy consumers in the second half of the year, although it clearly communicates that prices will increase. Such a scenario may effectively prevent the NBP from cutting rates, and in an extreme scenario it may even lead to a surprising increase if consumers show very high resistance.

According to the latest announcement by prof. Glapiński, Removing the VAT and energy shield could lead to inflation of up to 8%., in the second half of the year; and in such a situation, we would still have a strongly negative real interest rate in Poland. From recent announcements it also seemed that Prof. Glapiński expected the 5% VAT rate to be restored closer to the middle of the year, and the Prime Minister's comments suggest that the rate may return to 5% as soon as next month.

It seems that the zloty still has a number of factors supporting it, including: 'disinflation' may be seriously 'tested' in the second half of this year. At the same time, the outlook for the dollar has weakened following recent weaker-than-expected ISM data and increased expectations for Fed cuts in mid-year.

Today we pay less than 3,96 for the American dollar, 4,29 for the euro, 4,48 for the Swiss franc, and 5,043 for the pound sterling.

Source: Eryk Szmyd, XTB