Economic news

• INFLATION: According to the flash estimate, consumer prices were flat on a monthly basis in September, which translated into a small surprise in yoy terms – inflation stayed flat a 2.9% yoy. The details of the release were hardly surprising. Core inflation remains sticky, but managed to slow down from 3.2 to 3.1% yoy. Energy prices rose marginally for seasonal reasons. The surprise can be traced back to lower food prices (-0.5% mom), which bucked recent trends. In our view, inflation will not be seen as overtly dovish by the MPC. A more detailed comment on the data can be found on our website.
• SENTIMENT: Manufacturing PMI rose from 46.6 in August to 48.0 in September. The PMI is thus back to levels more consistent with other sentiment indicators and with European data, strengthening the case that the Spring drop in the PMI was a statistical artifact (residual seasonality, perhaps). September reading also brought an improvement in 12-month expectations.
• DEBT: Last week the Ministry of Finance published its latest debt management strategy (for 2026-29). The document is notable not due to changes in actual strategy and its operational parameters, but due to the mid-term debt trajectory presented by the Ministry. The MoF assumes that general government debt will rise to 75.3% of GDP by 2029 and public debt (national definition) – to 59.5% of GDP. The latter implies hitting precautionary thresholds and balancing the budget in subsequent years. Minister Andrzej Domański later clarified that the debt path was constructed under a no policy change assumption and additional fiscal consolidation will be enacted to avoid this scenario. There are other reasons to assume that this forecast is too pessimistic and the Ministry actually confirmed them. In particular, the recent run-up in government debt was partially driven by the need to build a liquidity buffer to be used to prefinance RRF spending. A more detailed look at next year’s borrowing needs can be found below. In other news, the Ministry of Finance announced that this year’s borrowing needs had already been met and 2026 needs are being prefinanced. Last week’s T-bill auction contributed to that goal slightly – last Friday the MoF sold PLN 4.4 bn worth of 51-week bills.
• BUDGET: Minister Andrzej Domański said that the MoF does not see any need for the 2025 budget bill to be amended. He added that September tax revenues were satisfactory.  

Next year’s borrowing needs are probably overstated

The state budget's borrowing needs are expected to increase next year from PLN 553 billion to PLN 688 billion gross and from PLN 300 billion to PLN 423 billion net, i.e. excluding the repayment of maturing debt. This information caused considerable concern in the media and raised doubts about the National Recovery Plan (KPO), which, according to the Ministry of Finance, is to contribute significantly to the increase in borrowing needs. We decided to break down the aforementioned figure into its constituent parts and try to assess what changes we can expect on the treasury bond market.

Let's start with the question of how borrowing needs differ from the state budget deficit. It is a broader concept and covers all the reasons why the Ministry of Finance needs to borrow money, i.e.:

• to repay (roll over) maturing debt,
• to finance the current budget deficit,
• to finance a possible deficit in EU fund budget,
• to manage the liquidity of the consolidated account of public institutions, including local governments,
• to grant loans.

This definition is somewhat complicated by the fact that it is not only the Ministry of Finance that meets borrowing needs, but also Bank Gospodarstwa Krajowego (BGK) and, periodically, the Polish Development Fund (PFR). For greater clarity, we have compiled them all in the chart below.

Historical and planned gross borrowing needs (bn PLN)

Note: 2025 figure is the expected execution presented in 2026 budget bill

Source: Ministry of Finance, Refinitiv

What can be gleaned from the chart above?

First, borrowing needs rose sharply in 2024 and changed its structure. Needs related to the repayment of old debt and current deficit financing now carry much more weight, while BGK and PFR bond issuance, which carried a lot of weight during the pandemic, have declined. This is a planned measure by the Ministry of Finance aimed at reducing debt servicing costs, which are usually higher outside (BGK and PFR) than within the budget.

Second, the planned increase in borrowing needs in 2026 is will result almost exclusively from items that have not played a significant role in recent years, i.e., the EU budget and loans granted by the State Treasury. These needs are likely to turn out to be much smaller than currently assumedby the Ministry of Finance. For reasons unknown to us, it has a habit of overestimating the expected EU fund budget deficit. The same applies to loans granted from the National Recovery Plan (KPO), although they have a much shorter history. Nevertheless, the 2025 budget assumes that they will amount to PLN 59 billion, while the current expected outturn is PLN 9 billion. It should be assumed that in 2026 they will also turn out to be much lower than the assumed PLN 113 billion. Moreover, their amount will not affect the issuance of Treasury bonds, as they will be financed from funds from a loan from the EU Recovery and Resilience Facility.

Historical and planned EU fund budget balance (bn PLN)

Source: Ministry of Finance

In practice, this means that the actual borrowing needs of the Ministry of Finance will turn out to be PLN 50-100 billion lower next year than in the draft budget (i.e., they will amount to slightly over PLN 600 billion gross and PLN 400 billion net). However, this information is of little significance to financial markets. What is more important is how the supply of treasury bonds will change. The value of maturing debt from previous years amounts to PLN 265 billion, and most of this amount will be covered by switching auctions and foreign issues.

On the other hand, the sales of new debt (outright sales auctions) will follow the budget deficit, which we estimate at approximately PLN 290 billion, i.e., an amount similar to this year's and slightly higher than the current draft budget for 2026 (PLN 271 billion). Why do we assume this? Because the draft budget assumes, among other things, an increase in certain taxes, such as excise duty on alcohol and sugar tax, which are unlikely to come into effect due to the president's veto. In addition, the execution of this year's budget is so far weaker than planned (VAT), which increases the risk of a downward revision of revenue plans for next year. The slowdown in the growth of the supply of treasury bonds will translate into less pressure on their yield growth.

Budget deficit and government bond issuance (bn PLN, 12-month rolling sum)

Source: Ministry of Finance

Financial market update

No major changes. Every attempt to weaken the zloty proves unsuccessful, and every attempt to strengthen it is met with stiff resistance. EUR-PLN is thus confined within a narrow range (4.25-28) and it is difficult to see what could break it out of this malaise. The FX market remains boring. The end of the week was rather weak for the bond market, but – as is the case with the FX market – we are not leaving the trading range that we have been familiar with for a long time. In the coming days, the focus will be on the MPC meeting, the outcome of which is a big puzzle for economists. We have not seen such a lack of consensus for a long time. The potential for surprises is high and, in our opinion, the cycle of cuts is approaching the halfway point, but it won’t be an ample opportunity to change the NBP’s rhetorical strategy.