Poland and Czech Republic: The same shock, two different reactions

Good morning, good afternoon, and welcome to another ING research call. My name is Franciszek Dabrowski. I'm an email Strategist based London. Today I want to talk Poland and Czech Republic. I think a very interesting story since the start of the US-Iran conflict. Obviously, all markets are driven by the overprices, but I think in the background, We can see quite interesting divergence or different approach to the same story. So this is something what I want to... Talk about today. Hey, uh... We have two speakers, obviously our Economist, from both countries. We have Adam from Warsaw and we have David Prague. We're going to be talking about both I want to touch on the inflation profile, what we expect from the central bank. And from there, we have also a few other topics. specific for the country, I think we cannot touch. I think we can start with our forecast because I guess I can... spoil our baselines what we have for both which is basically quite boring because you don't expect any changes in rates compared to market pricing. I think we also expect quite a relatively low inflation given how big a shock in energy prices we've seen in the in the CE. E. And... We also see the downside surprises in the inflation, which I think is also a good topic to discuss. So I think there's a lot of stuff we have to touch today also why the GDP or the Economist, resilient in the current situation in both countries. I think in Poland it was always the case, but the Czech Republic remarkably strong as well. But sometimes we also can see some some slowdowns. So I'm going to David about that. What does it mean for the CMB? All the posts aside, we see a quest for the virgins, as I said. We've seen CMB already hike the rates as the only central bank in the region so far. On the other hand, we have MPB who is talking basically about the rate. cut. So obviously a very different approach. the same situation and the market pricing is still quite hawkish so i would say or both remain to receive rights. But again, giving the global backdrop is quite a difficult situation. But hopefully we can get to our local stories. the central bank is going to matter more and that's why we have this call to discuss a little bit more details about it. Czech Republic hike in Poland, again very oil driven. We have a central bank meeting, the CRB meeting I think this week, MVP has a pause in August, so we're going to get back to... the central bank meeting in September. But still, again... Kat discussed last time, I think, triggered a lot of discussion about Poland. Again, that's the topics for today. Q&A. As always, you can submit your questions. questions i think it's gonna be somewhere in the top right corner or you can ING me or & will try to ask the question on your... behalf. Just checking to see FI will be talking about it later more. we publish a new trade idea which is long, zloty, short I would say rather. optical trail to make it a little more interesting these days. let's say normalization of the bias of the both center banks as I said we don't expect Any changes in the race in both and the market is or. the bias of the central banks is I'll focus and check our direction in Poland. And we think it's going to more, let's say, synchronize, again, which should be visible in the FX. legacy trades which didn't work that well in check-in Poland i will touch this one later & would say probably from the trade idea point of view still the rest of the regions It's probably... which means receiving Hungary or Turkey. FX. But yeah, again, we will get there. We'll start with Grant, and let's go Adam. I want to ask about the inflation actually, because last week on Friday we had a July inflation front which didn't surprise the downside after So that's quite nice. So I'm going to ask you what's... What the joy number is telling you about the outlook for the rest of the year? I think we have to unmute Adam. Okay, I think it's... already working okay hello everyone so the major driver of increase in Inflation in July was actually fuel prices and that was the only ...factor that was actually behind the high reading. From the beginning of July, authorities restarted the previous stream. lowered VAT rate on fuels. So it went up from 8% to TwentyThree regular VAT rate. At the same time, we had that renewal. tensions in the Middle East, so oil prices started start trending north again so all that translated into increase in If you look elsewhere, the price pressure is quite benign. if we remove fuel prices from headline. CPI inflation would be actually below the target at 2.2 percent and maintaining the downward trend so so far we don't see any second round effects we don't see any upward pressure on prices elsewhere. So it's so far purely energy shock focused on. fuel prices involved. In terms of the prospects, I mean, we expect inflation. to be above the central bank target, which is 2.5% by the end. of the year, but at the same time it should remain within the acceptable deviations from the target which is plus minus one percentage point so basically we expect inflation to remain below three & half percent by the end of this year, which means the rates will probably remain unchanged by the end of this year as well, as Franciszek already mentioned. Do you have an arm? explanation why the inflation is so low because i think it's a topic for even before the start of the conflict and you were just London in June & think it was a question every meeting we had like why the inflation in Poland is so low despite the GDP is fine. quite a bit, you know, very strong EU funds inflow. So people would expect that the inflation is going to be bigger. problem have you felt like The most of the increase in the inflation recently was the fuel price. prices. So there are other reasons why the inflation is so low in Poland. I think we have a chart, my favorite one, for the durable goods, which is showing quite a different path in Poland. Maybe we can see the chart. You can tell us what you think about that. reasons Yeah, we have several factors behind relatively low inflation in Poland and what you see. here is one of them. I mean, we have decline in durable goods in Poland. We think it is linked to the situation. We observe globally. namely the competition. Mountain competition from China. imports from China to Poland is rising rapidly and we know that those Products are priced competitively so we observe that having impact on durable as well as semi-durable goods. in Poland. On the top of that, we have slowdown in wage growth. In Poland, after years of double-digit growth, Now we see which is moderating. quite substantially and that has impact on services prices. So services inflation is also slowing down and actually the demand situation is not as robust as you could think looking at the headline figures in terms of GDP growth or even consumption. I mean, even the recent increase in fuel prices. It did not discourage people from purchasing fuels. So actually, That means that they spend, I mean, households spend more of their budget. on fuels and that means that have less money to spend on other goods and services. And what we also see that for the retailers, that's a challenge because so increasing prices in such a situation is quite difficult because because of this demand pressure. demand barriers. So consumers are quite sensitive to any increases in prices. So prices are relatively stable. We have positive developments on the food market, not only in Poland, but also throughout. the region and on the top of that finally in Poland we have this price war among the biggest retail chains. So all that taken combined together means that apart from the energy shock. price pressure elsewhere is not particularly strong and without the shock inflation would be much lower, probably below the central bank target. And that's all for now. Thank you for watching. food prices. Is there a sell-off for the rest of the world? Are we going to see some trial? Because we're discussing in other countries as well, as you said, it's not just... Poland, but Poland is quite specific for the agriculture and you know market usually very self-sufficient so it could It could be a different story, but if that is how it's going to work... I mean, so far, not really. I mean, we had really sharp declines in input. prices in May and June. Some people were afraid that in July we're not going to see such a big downward move. But Surprisingly enough, we saw another decline in in food prices and it's not only one category of goods, I mean, we see relatively low. prices of meat, dairy products, vegetables. fruits, so this is not a simple story. As you already mentioned, Poland is a big agricultural producer and producer of... processed food, we know the crops this year might be somewhat weaker. than what we saw in the previous year. But at the same time, we hear that in Ukraine, the harvest is going to be to be quite good this year so the overall situation is quite complex because of those international flows. & think the the prices in the region may remain subdued for some time. Until recently, one of the risks was associated with fertilizer prices. But with gas prices moderating slightly, we don't see such a big problem. pressure on 30 large prices. So I think that risk, at least over the short term, is not that big. substantial in terms of outlook so i would expect food inflation to be higher next year than this year but this year we are already in deflation in Poland, which is quite surprising. And this, as you mentioned, is Not only. a Polish story but also a regional phenomenon. Yeah, I think I can just mention 0.8. percent month-to-month decline in the last July number, right? So, ah, thank, uh, oh. I think the bias for the food prices again could be lower given the pollution. indication we can see here Good job, guys. It's okay. I'm sorry. Wonderful. I'm happy. We cannot cut the race as Mr. Gopinski mentioned last. Last press conference. Yes, I mean, Mr. Glapinski was extremely dovish in... July at the beginning of the month, we should keep in mind that it was in a situation of still quite calm situation in the Middle East. I mean, it was the first days of the renewed tensions in the region at the same time that the last print, Mr. Glopinski, had at hand was 2.5%. that July figure, which was exactly at the target. So he was extremely he hoped the central bank can return to this. easing cycle that was abruptly stopped by the tensions in the Middle East. but at the same time I think He's an exception in terms of the overall policy council, he was the most dovish. member of the Council, other policymakers were more reluctant and more concerned about potential risks linked to this situation. in the energy market. So Mr. Glapinski mentioned that he could imagine 25 basis point card after the summer, but everyone else. I mean in terms of policymakers. was not so eager to go. follow Mr. Lipinski. I don't think... This is the most likely scenario. We saw inflation going up to 3% in July. As I mentioned, we expect it to trend upwards, maybe towards the upper bound of acceptable deviations from the target, 3.5%. So this is certainly not the environment to... So that's why we think. rates will remain unchanged this year and that's been our call for all. from actually from the beginning of that. conflict between the US and Iran. Speaking of speaking on behalf off of mr gropiletsky i can say that this inflation surprised the downside many times in the past some like in the rest of the region. So Well, I feel like I'm scared. Who would be the given for Gopinsk and the rest of the NPC to come? the race actually Or what will they see the risk for? for you know your forecast I think that the inflation would need to return to the target at least for the central bank to even consider. monetary easing and our baselines scenario looking forward actually assumes the next move to be a rate cut. So we think in the middle of 2027, we're going to see inflation below the target, closer to 2%, and that will certainly make room for... monetary easing and we expect two 25 basis point cuts next year in the middle of 2027. So again, I can only repeat. our earlier call, we were saying that the next move will indeed be a cut. but probably not this year. Okay, so that's the Fleischer and the Central Bank. What about the Fisco, I think? The fiscal is going to be quite interesting very soon. We should get a budget draft probably at the end of August, if I'm not mistaken. We are already getting some headlines almost every day. I saw what But what's your expectations first and then let's discuss the alternative scenarios, let's say. Yeah, I mean, first of all, we should keep in mind that the fiscal policy is very expansionary. in Poland with general government deficit around 7%. as of now. So in terms of scope of other stimulus I think is quite narrow I mean in terms of providing additional fiscal spending or tax cuts, I don't think the government has a lot of room. So I wouldn't expect any fireworks in the... the 2027 budget draft. I mean, on the one hand, we did not expect any consolidation measures. especially given that we have general elections next year. but at the same time any substantial fiscal stimulus is quite quite unlikely. I think authorities need to proceed with caution. the political setup is quite difficult because they know that to the president, Nawrocki. is making it quite difficult for the ruling coalition in terms of fiscal policy, namely he blocks any cuts in spending but at the same time also blocks any increases in taxes. We saw that. in the case of that windfall gains tax recently. So they know they may be trapped if they go too far. So I think... We're not going to see any substantial fiscal stimulus. You already mentioned that there are several ideas flowing. on the market, I mean, one of the unfulfilled. promises of the current ruling coalition is the increase in tax-free allowance in personal income tax. It was intended to be increased from 30,000 lottoes to 60,000 lottoes. so The government did not deliver & don't think there's room. for that in 2027 budget because the fiscal cost is quite substantial. it's 60 billion zlotys, which is roughly 1.3%. of GDP. So with the starting point, I mean, 7% of GDP. deficit already I don't think they can squeeze that into to 2027 budget. The other idea that is floating in headlines is the increase in the tax threshold. in personal income tax from 120,000. annually to 140. below that threshold taxpayers pay 12% of personal income tax. Income tax rate above that it's 32%. percent so it could provide some savings to Smith. higher earners in Poland, but Again, this particular solution is much cheaper from the fiscal point of view. it may cost the budget about 10 to 12 billion lotos which is 0.3 percent of GDP. So I can imagine that kind of stimulus penciled in and included in the 2027. budget but in terms of the tax-free allowance I think it's still the thing. of the future, maybe they can promise that in... in the future budgets if they gain. voter support, but given the starting point, this is certainly not the topic for 2027. just to follow up on I can see quite a lot of clients are asking. recent days and weeks about the rating. Obviously, we just had the rating review in Romania. quite dramatic I think the first one is going to be in August. but probably still before the budget introduction. Or let's see, I don't know if there is any date for the budget. I FACEBOOK This could end up... What's up, I'm D-D-D- too far and Also the second question is if or doesn't matter at all. I mean, generally, I mean, we have negative outlook by Fitch and Moody's. So certainly the downgrade is a potential risk. But at the same time, when I look at how the Polish bonds are traded, I wouldn't expect and major market impact because I think The downgrade is already pressed in. So it would definitely signal that the situation in public finances in Poland is far from perfect. but at the same time we are well into the investment grade. So one. notch or even two notches would not change the picture. in terms of investors, which, as I already mentioned, are quite aware of the situation. and challenges in in Poland, I'm not sure that the government particularly concerned so far as the impact on the market is not. substantial in terms of cost of financing. They can probably ignore that, but we know that. the corporate befitting agencies they obviously they're interested in and maintaining the positive. assessment of the country. But as I mentioned, I mean, there are a lot of fiscal challenges we have. high deficit, we have this political gridlock. which makes it quite difficult for the government to make any fiscal adjustment. public debt is on the rise. So a matter, probably a matter of time. in terms of the downgrade. The key question is whether or not rating agencies would like to. Proceed now. at the beginning of election campaign or maybe wait for the outcome of general elections and then Make the final assessment and adjustment of the ratings. Good night. Perfect. Thank you. Thank you very much, Adam. I think we... I should move to Czech, given the time. I don't want to steal any time from David. & fell as a bike on the wall. Let's start with inflation again. We're going to get the inflation print tomorrow, actually. So maybe let's start with... expect David and walk us through for the your outlook for the rest of the the rest of the year. I think we have to unmute you. The inflation in... July will definitely quicken. and mostly on the back of fuel prices. So first, mid this month. or kind of July, the government got rid of the kept on margins on fuel prices and as well kind of this reduction in excise duty on diesel. has been removed and it seems that everyone is increasing prices on the fuel stations. And when I compare this to the model outcome and how much expert judgment I have to add to to chase this increase that's... So, suggested by preliminary mock. kind of data survey It looks like the... fuel sellers are really adding even more than what would be appropriate. to come to levels that have been. before all this crap was... implemented. So we are going to go to 1.7 in my estimate. with headline inflation. But the fuel prices I... currently perceive as Both ways risk. and we may even get 1.8 or 1.6 depending on how much of the fuel price moves. lands in the measured CPI. And for the rest, there's, I believe, not... Not that much things moving, nothing that much important. Our core rate forecast annually remains at... 2.8 which is perfectly fine in my view for the CNB I believe that with time it might be that the core inflation will be gradually actually slowing down. For sure, there will be some peaks at the beginning of the year. and end of this year. driven a lot by by the comparison base. but I'm gross. I perceive the situation as there is Not that much space when looking forward. We're looking ahead for kind of the... the prize items within the The core inflation basket to gain much more traction. This year we meet and we're gonna have a In flash-to-thru scenario, CMB meeting on Thursday, do you think the CMB is going to be happy with this development? they're going to see it differently and be hawkish again. We have inflation, headline inflation below the target, core inflation. is not really a big trouble now. and both are in my forecast. pretty well on the monetary policy. a relevant horizon. So for now I read a situation that there is nothing to worry too much about price level heading out of the hand. So for the check economy and for the bank board, I currently don't see inflation being too high. is the main worry So I believe rather than... And even wire potential second round effects wire. demand that The performance of the real economy might start to get a bit worrying. in the next two quarters. My point is... I've always expected that kind of the Middle Eastern crisis and conflict. will have some repercussions for the real activity. And kind of when it started I saw a lot of complacency in the institutions, in the markets. & thought, like, if there is like zero impact and the economies ride it out, I would. I would be happy to learn, but I would be very much surprised. And the last reading for check economy. for the second quarter of the preliminary estimate. was rather weak. & believe partially that's already the impact of hormones. And there's a lot of kind of hard things to gawk and to estimate. Like for example, a lot of firms have been pre-stocking. to secure still low prices or to shield themselves. against eventual issues in supply chains. So the second and third quarter. may be really distorted, hard to estimate. & believe that simply the third quarter still may even get most of the heat. And then So we had 2% real. Expansion annually in the second quarter. And if you get then with a third quarter fairly below 2%, Swim. that's not suitable for the Czech economy. And at that moment we could see households starting to hit the brakes in consumption. because in the survey they are already starting to get worried. about the future performance of the economy. about their future wages. and we see even firms get under pressure. The profitability Even in the first quarters data, we see it got skewed. It's kind of squeezed. And when the profitability is declining, then wage growth is the first thing. to go. & mean... The European firms and Czech firms, of course, either are between kind of two pressures. On the one hand, you've got... increased input cost, be it energy prices due to oil prices or EDS1 or whatever. or be it basic materials. And on the other hand, we have got this immense pressure from Chinese competition. where China went out with their policy. outperforming in production. everyone in everything and it seems that the EU is not able to respond. And we clearly see the European firms getting under pressure. A lot of bankruptcies in Germany and kind of declining profitability even for the Czech firms. So here I'd be a bit more on the side. Well, It starts to be about the real economic performance. and potential spill-a-wars. it wages and maybe even into the dynamics of the model. You just mentioned images. I feel like it's one of the topics that CMB is kind of worried about. We've seen big surprise it upside in the first quarter obviously it's a little bit more mixed maybe you're gonna touch the story but Do you think it's going to slow down finally? Because this is probably one of the key despite the headline inflation is fine, the CNB still can be hawkish just because of the wages. & few other reasons. market Right. So I don't take the first quarter's number of cultural wages. at face value at all. So it was punchy. You could use it as an argument for Titan Monetary Policy but there was a lot of caveat. First, The level was kind of reduced for 24 and 25. So in levels we basically remained on our previous forecast. So that's another big thing. Second, if you look at chart of wages and real GDP, I mean real wages and real GDP, I don't think we have got... Oh, then for Czechia... Real wage is just catching up. to real GDP growth. So even from this perspective, I don't see it's a big problem. And third, we see from the monthly data that wages in manufacturing, the annual growth. really slowed down considerably. in June. For sure, it's always hard to square the monthly and the quarterly. quarterly data for the wages for the Czech economy unfortunately. but I read it as as wages starting to get under pressure. and we don't gonna see this kind of punchy growth rates we have seen. in the previous couple of quarters. And in this respect, I believe that Karina Kubelkova did the right thing. She kind of talked about the uncertainty coming from the global environment. and she voted for on hold & believe that was the right thing. the rest of the board in my interpretation went ahead a lot because of kind of politically driven reasons or sometimes even you could say personal reasons and went ahead with a single hype. & believe that the economy, including the labor market. In the next couple of quarters, will show things are rather on the softer side. than on the more hawkish side. The other two thing is... In our estimate, the Economist, again into territory with with kind of negative output gap. And we see the unemployment rate slowly. but trend-wise increasing. or more than a year. So I read it all as... No, we don't have the 2.7 growth or more We have hoped for Antoniak. we will have something like 2%. percent at best And that's not an economy where... you produce above your capacity. and everything is just getting... Red Halt. So my reading is the Czech economy will operate until end of this year. below its potential. the output gap will get neutral at the beginning of 2027. & don't see this as broadly. pro-inflationary environment. So I would just say, thanks more for the sour guy. is Red Cup or Red Hike. In the long term, we know the short term, we don't have anything, but what do you think? Yes. So. If we have this 2% growth for this year, which is our baseline. and acceleration to 2.4 in 2027. And if things go well globally, then even above that in 2028. then you can easily sit it out at this 3.70. And then once the Economist, doing really well, the output gap flips to the positive and you get kind of tightening in the labor market. then you would start a genuine hiking cycle. & don't see that coming earlier. then Early 2028, things go in line with our baseline. and maybe a bit earlier late 2027. things go much better. At the same time, with our baseline, I rather see more risks to the downside. for the GDP for both years. because this escalation oil prices around 90. Like it or not, it's another wave of uncertainty. kind of demand in the Middle East will not get red hot. That's an important exporting. area for Czech exporters. So I rather see with all this, with Iran. not accepting any truth and this whole thing maybe The Dranging Horn I believe that there is kind of quite some downside. to the 2% and 2.4%. friend economic performance for Czechia for this and the next year. And then... There's definitely kind of not a recipe for Another rate hike anytime soon. So if things go well, relatively well or well, you can set it out at 3.75 and then start a new hiking cycle. Late 2027 at earliest. If things go wrong, we have got a week. Third quarter. Then well, it may be... the CMB may get into the place where like, hey guys, you're not seeing that coming, you're rising great, well, And then things get difficult. in terms of communication. And then we can get into the situation when kind of brokowska and fried said If the policy proves to be too tight, we may backtrack this one hike. I don't see that as a baseline. Definitely not. Setting it out at 3.75. is most likely outcome. BARD The thing is... that the impacts on real economy are pretty hard to estimate. You have a lot of things. loose ends in the air about this breast stroking. influence and all that. So we still may kind of be lucky if we get this 2% growth. And I've pretty quickly kind of reduced our forecast from 2.7 to 2. being convinced there will be the impact. and now others have followed. And the question is... Is there more trouble in the pipeline? And the answer is... I'm not painting. weaker growth than 2% for now. But we may get there. We have seen PMI. still in the expansionary zone, but weakening. for July we have seen the consumers starting to worry about the future economic performance. So all these things may show there's still some trouble. in the pipeline. I feel like we're reaching our time, so we have to move on. But since the CME is going to be atrophied for no longer. Let's look at a few things on our side. I already mentioned the long, slotted check. I would say rather tactical trade for the few days or weeks during the summer. As you heard from our Economist,, we do an expanded thing for money. or from both Cesar Banks and the regional. The CRB, obviously the market has some hawkish bias and we should see probably some slowdown on this side. We can see oil prices dropping just during our So I think the best is to receive in both countries, but Czech is probably the most. or more juicy one at the moment, given how much is. If our price is the same, so if we see some correction, the red differential is here, I think the effects should correct as well. We've seen actually quite decent sell-off in Zloty Check. in the last few months, so I think there is some space to go higher. I was going to stay running the long PoGBS swap for some time, but actually closed just recently as we discussed the fiscal stories kind of getting more, we're going to get this budget introduction or the draft. introduction, Rory. But as soon, I feel like we can see some signs of doing this in the markets. I feel like it was very crowded trade, surprisingly. Yeah, I will see you. a big back into positioning in and after the first ceasefire or US Iran deal. So far this trade is very good & think the story is worsening slowly. And also the technicals are not as great as they used to be. We can see the... I want to issue quite a lot for the August, despite, I think, general expectations. This is still to keep an eye on. Obviously, the variations are interesting, but I think the story is getting some hit. or change your best story that's this on the On the... We've seen the decent reduction in the issuance because of the retail issuance in the last Check out the minifig didn't schedule at the beginning of the year and not surprisingly or We're surprised by the demand, so we can see some decent reduction in the quite interesting. So I think this is something to look at. I don't know. FI see Czech that's fallen for some time, a kind of normalization. I was expecting some normalization in the spreads, which obviously didn't come given the central bank companies because of the bullish lack and now we are left in the 5353 receiver. which I still like but would like to get out soon The rest, I think, there's not that much. So we'll see about the CMBA. I think this is going to be quite interesting. There is no MVP meeting in August, so we're going to have to wait and see. to wait for, for, September, what Mr. Galpinski will not tell us, but I think these stories are still going to be interesting enough & think that's it from our site I'm just checking FI missed anything I can see also the we I think answered all the questions which were asked What's it? Yeah, that's it. Thank you very much. Thanks, David Anna for joining. Also, thanks for... clients joining. I can see the attendances. It's quite high given the summer. and Speak next time. Thank you.