Economic news                                                              

• MPC: MPC member Iwona Duda argues against a September rate cut, saying current data are unlikely to sway the Council. By contrast, Henryk Wnorowski told Bloomberg he sees a high probability of a 25bp trim next month, followed by a pause through year-end. Our baseline remains: two 25bp cuts by December, but the balance of risks is skewed by a likely Q4 energy-price rebound and the expansionary tilt of the 2026 fiscal plan.
• GDP: The final StatOffice’s estimate indicated that Poland’s GDP grew by 3.4% in 2Q25, in line with the flash reading. The GDP structure has turned out to be quite surprising as private consumption rose by 4.4% yoy (vs. 3% expected) and investments declined by 1.0% (+5% expected).
• INFLATION: The August flash estimate of CPI inflation showed 2.8% yoy, compared to 3.1% the previous month, below the market consensus of 2.9%. Month-on-month, prices fell by 0.1%. The deceleration in core inflation to around 3.1% yoy is particularly encouraging, although the still slightly elevated food price growth signals risks for the coming months. These data strengthen our arguments for an interest rate cut in September and further monetary policy easing in the fourth quarter. Inflation will remain close to the target for a longer period, running below 3% yoy by the end of 2025. We wrote more in our commentary following the data release.
• BUDGET: The cabinet approved the 2026 draft budget with a headline deficit of PLN 271bn. Versus the projected 2025 outturn, revenues rise 7.3% while expenditures edge down 0.3%. The general-government shortfall is put at 6.5% of GDP. 
• FISCAL POLICY: Minister of Energy Miłosz Motyka said the government will table in September a bill to extend the retail energy-price freeze through Q4. Separately, President K. Nawrocki reiterated opposition to tax hikes, arguing consolidation should come from tighter tax compliance. Our take: there is little room to lift receipts materially via enforcement, effective tax take has been relatively high in recent years. Some deficit relief is possible in 2026 because, unlike this year, large BGK/PFR bond redemptions do not fall due; this could trim the gap by >PLN 30bn versus 2025.
• PMI: PMI for Polish manufacturing rose from 45.9 in July to 46.6 in August, close to the consensus and our forecast. We have concerns about the PMI's ability to accurately measure sentiment in Polish manufacturing and its impact on hard data. We wrote more on this topic in one of our daily reports.
• CREDIT: Elevated monthly flows (above PLN 8bn) have persisted since April, helped by monetary easing and nominal house-price gains as BIK reports PLN 10.0bn in zloty mortgage originations in July. We expect new zloty mortgages to total roughly PLN 100bn this year.
• LABOUR MARKET: The registered unemployment rate printed 5.4% in July (GUS), above the ~5.0% seen in spring. The uptick reflects regulatory changes—looser eligibility criteria—rather than a cyclical deterioration, slowing transitions from unemployment into inactivity.
• RETAIL SALES: Real retail sales rose 4.8% yoy in July after a weak June (2.2%), beating the 3.5% consensus. The surprise came from stronger autos and durables and an unexpectedly robust “textiles, clothing and footwear” category.
• MONETARY AGGREGATES: M3 growth accelerated to 10.8% yoy in July, from 10.5% in June and above the 10.6% consensus.

A fiscal trilemma: shrinking deficit, swelling debt stock, and borrowing needs skewed by the National Recovery Plan

Call next year’s state budget “moderate”, given the trying backdrop. The finance ministry now concedes that this year’s revenues will undershoot plan by nearly PLN 35bn, largely on weaker VAT. Hardly a shock: in-year execution had already flagged that the Budget Act overestimated consumption growth. What, then, is the response? Judging by last week’s press conference, the ministry aims to offset the shortfall with proportionate spending restraint, keeping the deficit at its initial level (just under PLN 290bn). Those will primarily be through lower subsidies to social security funds due to solid social realization of contribution payments. Additionally, the Ministry of Finance expects so-called natural savings across all budget sectors due to the inability to cover all expenditures (e.g., delayed investments). Investors, though, fixated on the jump in net borrowing needs. Should they? Not quite: the change is an accounting artefact of KPO cashflows, Poland’s National Recovery Plan under the EU’s RRF. Strip that out, and borrowing needs are broadly unchanged versus 2025.

Next year’s deficit is penciled in at PLN 271.7bn, less than in 2025 and below the gloomiest forecasts (>PLN 300bn, ours included). But is the comparison fair? Only if you net out this year’s refinancing costs tied to BGK and PFR paper (at least PLN 32bn), which will be absent next year; the next such maturities fall in 2027. On a like-for-like basis, the deficit rises from roughly PLN 258bn to just under PLN 272bn, up 5.4%. That is only a shade below the likely pace of nominal GDP (6-7%). Consolidation or loosening? Neither: more of a fiscal holding pattern.

General government debt

Source: Macrobond, Ministry of Finance, Pekao Research

As for revenue composition, several points stand out:

• VAT revenues are slated to rise by 6.4% versus the inflation-adjusted 2025 outturn. Given the consumption forecasts, that looks defensible.
• Excise is put at PLN 103.3bn and assumes higher rates on alcohol and cigarettes. Will the president veto it? Quite possibly—if so, excise would come in about PLN 5bn lower.
• CIT totals PLN 80.4bn and bakes in a higher corporate tax for banks (30%). The ministry reckons that adds PLN 6bn. Another likely presidential veto? Less likely than on excise, but still a risk.
• PIT for the central budget is virtually flat versus this year’s plan (PLN 32bn), because local governments’ PIT share rises again—by PLN 19.7bn, to PLN 193.8bn. With wages climbing, PIT’s overall take should track pay growth—plausibly so.

Bottom line: legislative friction between government and president could shave revenues by PLN 6.5bn (bank-sector CIT) plus PLN 5bn (excise), PLN 11.5bn in all. Without symmetric spending cuts, the state-budget deficit would widen from PLN 271.7bn to PLN 283.2bn. On the reasonable assumption that these tweaks pass through one-for-one to the EU-method general-government balance, the deficit would tick up from 6.5% of GDP by roughly 0.1 percentage point. Material? For the overall fiscal stance in the year ahead, barely.

Budget balance vs. general-government balance

Source: Macrobond, Ministry of Finance, Pekao Research

Finally, a word on net borrowing needs, which the ministry pegs at almost PLN 423bn. Why the striking divergence (an almost PLN 20bn year-on-year fall in the nominal budget deficit), yet nearly PLN 60bn more in borrowing? If net needs (excluding debt-service costs) measure how much market funding the treasury must raise to pay its bills, why rise as the deficit falls? The answer lies in timing: the settlement schedule for KPO funds. The surge looks transitory, driven by the need to pre-finance investment tranches to firms before Brussels wires the money to Warsaw. The budget shows that the Ministry of Finance plans to grant loans totaling over PLN 112 billion. We believe this primarily concerns loans to energy companies for the construction of offshore wind farms and the modernization of power grids. These loans will be financed from EU funds, primarily the KPO. Moreover, the unexpectedly high level of borrowing needs next year is accompanied by a significant downward revision of borrowing needs for 2025, specifically from PLN 366 billion to PLN 300 billion.

The KPO loan portion itself does not generate borrowing needs for the state budget. Quite the opposite: the KPO loans are a source of financing for the state budget's borrowing needs. These loans will have to be repaid in subsequent years, but this does not automatically mean an increase in the state budget deficit, as the state budget will receive repayment of the loans it itself has granted. This means that the benchmark for next year's bond supply is more the state budget deficit than the nominal level of borrowing needs. This means that the supply will likely be less than PLN 300 billion (net) rather than over PLN 400 billion. A significant source of uncertainty is treasury bonds, which will not be sold directly on the market but will instead be used to support funds and extra-budgetary institutions through recapitalization.

State-budget deficit vs. net borrowing needs

Source: Macrobond, Ministry of Finance, Pekao Research

Financial market update

No major changes on the FX market – the zloty is right in the middle of a multi-month range and there is no interest on the market for a more decisive move in either direction (below 4.24/EUR or above 4.30/EUR). Volatility has returned to the FI market, though, and we have seen solid increases in POLGB yields across the entire curve, with a predominance of the short and long ends. We will not read too much into the behavior of individual tenors, as SPWs tend to be quite volatile. Looking back at the entire week, the market verdict is clear: higher rates, steeper curve, wider swap spreads. It would not be too risky to say that the market is still digesting fiscal issues and assigning elevated premia. Additionally, as we mentioned in our last commentary, global environment is not favorable for long-term bonds, and in Poland, given the lack of a 30Y benchmark, 10-year paper is falling victim to global trends. In the coming days, we will focus on the MPC's decision on interest rates. After the latest inflation reading, a rate cut has become almost certain, and there has been speculation about a larger scale cut. However, the Council likes to surprise...