Polish inflation:Up to the target

December’s flash CPI data surprised markedly to the upside, with headline inflation rising to 0.8%y/y from zero in November.

    The CPI breakdown will be published only in mid-January, but, beyond more expensive fuels andfoods, core inflation also appears to have accelerated.

    Rising fuel and non-fuel energy prices as well as more expensive foodstuffs should boost CPIinflation towards the central bank’s target of 2.5% in Q1 2017.

    The direct impact of supply-side factors on CPI should moderate later on, but rising underlyingpressures should keep inflation around 2.5% for most of the year.

    Consequently, we have revised our already above-consensus forecast for average CPI inflationfor 2017 to 2.5% from 1.9% (for more forecasts, please see Global Outlook: Fiscal Launch).

    In our base-case scenario, the Monetary Policy Council will keep interest rates unchanged in2017, as growth is set to remain fairly soft and core inflation will lag the rise in the CPI.

    However, were the zloty to continue weakening and market volatility to increase again,policymakers would have to tighten policy and restore stability.

    Irrespective of the MPC’s decisions, higher headline inflation is likely to fuel rate-hike expectationsas soon as the spring, we think.

    In previous monetary cycles, Polish policymakers have always raised interest rates when inflationhas (even temporarily, in retrospect) exceeded the central bank’s target.