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Erste Group on Polish fixed income

January 18, 2013
The inflation rate dropped to 2.4% in December and was below the central bank target for the first time since September 2010 (for details, see Short Note). The disinflation path has become increasingly visible and we expect this trend to continue. As there is little demand pressure (real wage growth has been negative and unemployment has been increasing) and the economy is slowing, we expect the inflation rate to drop further and reach bottom in 2Q13. We foresee the headline figure to be 1.6% on average in 2Q13.

The low inflation figure, which was slightly below market expectations of 2.5%, was seen by Chojna-Duch as a factor which increased the probability of a rate cut in February. In the opinion of Kazmierczak (hawkish MPC member), the inflation rate suggests that interest rates should be lowered, but this is still not certain. There are other factors, such as the exchange rate and level of bond yields, which should be taken into account. We expect the interest rate to be 3.75% at the end of 1Q13.

We revised our growth forecast for this year. We expect the economy to grow by 1.6% in 2013 and by 2.6% in 2014 (see Macro Outlook). The main reason for another downward revision to our growth forecasts for Poland is the very weak domestic demand. In the same manner as it was the pillar of growth during the crisis, it will drag the growth down this year. On the back of the weak economy, we expect inflation to drop further and to be 1.9% on average in 2013. We expect the PLN to lose value to 4.16 over the course of this quarter and then to slowly start to appreciate. We also see room for yields to drop over the course of 1Q13 (10Y yields to be at the level of 3.69% at the end of 1Q13) and then bounce back when the prospects for economic growth improve.