Economic news

• MONETARY POLICY: The likelihood of interest rate changes in Poland until the end of 2026 or even the first quarter of 2027 is low, the propensity to raise rates is slightly lower than a month ago, and now is not the time to signal a return to rate cuts" - assessed the MPC member Ludwik Kotecki.
• INFLATION: The Central Statistical Office confirmed in its final reading that CPI slowed to 3.1% yoy in May. Detailed data also confirm our conclusions formulated in the commentary following the flash inflation estimate: the main cause of the surprise was a decline in vegetable prices (by 8% mom – a record for May), while core inflation only increased slightly to 3.1% yoy from 3.0% in the previous month. The faster-than-expected decline in oil prices following the agreement reached between the US and Iran is currently offset by the early withdrawal of indirect tax cuts. Consequently, the inflation path remains largely unchanged. Inflation will hover around 3% yoy in the coming months.
• STATE BUDGET: After May, the state budget deficit reached PLN 108.2 bn, meaning that in May the budget had a deficit of PLN 19 bn (PLN 2 bn more than in the same month of the previous year). The weakness of budget revenues, which remained unchanged year-on-year, is particularly noteworthy. This is partly due to a decline in VAT and fuel excise tax (the government CPN programme), offset by a solid increase in CIT revenues (+27% yoy). Public spending growth was moderate in May, however, at only 3% yoy, half the nominal economic growth seen in recent periods. The overall public finance deficit has likely stabilized at a high level of about 7% of GDP and is likely to begin to decline slowly in the second half of the year, following the expiry of the CPN programme.
• SENTIMENT: Polish consumer sentiment continued to rise in June and is now close to levels seen before the outbreak of the Gulf War. In particular, inflation expectations and the assessment of one's own financial situation have returned to baseline. The Gulf War will negatively impact private consumption growth in Poland, but it will not be a precursor to a deeper slowdown. We will discuss this further later in the report.
• INDUSTRY: Industrial production in Poland increased by 4.1% yoy in May – significantly more than the consensus forecast of 2.5% yoy and relatively close to our forecast of 3.4%. The negative effects of the fuel crisis are currently limited mainly to increased costs and a decline in the availability of components and raw materials in some segments. In our opinion, investment demand deserves much of the credit for this. We wrote more about the Polish industry in a separate commentary after the data release.

The Iran War and Polish consumers: out of sight, out of mind

Polish household sentiment improved – the current consumer confidence index rose in  June from -11.3 to -9.9 pts, and its leading indicator rose from -8.5 to -7.7 pts. These values ​​are only slightly lower than in February, before the outbreak of the Gulf War. Therefore, it can be concluded that the oil shock had a minimal impact on the sentiment of Polish households – especially compared to events such as the Covid-19 pandemic or the war in Ukraine. If nothing changes, finding it in consumer sentiment index charts will be very difficult in the future.

Consumer sentiment indicators (pts)

Source: Statistics Poland via Macrobond

If we break down the economic sentiment indicators, the picture is similar – Polish consumer sentiment has returned to pre-Gulf conflict levels in virtually every respect.

Change in consumer sentiment compared to pre-war levels (percentage points)

Source: Statistics Poland, Pekao Research

The rapid improvement in consumer sentiment poses a challenge to the prevailing scenarios regarding the impact of the Gulf War on the Polish economy. The main channel was supposed to be private consumption, and there are good reasons to believe so. The bargaining power of consumers and employees is generally weak. We have already seen a hit to real consumer income in hard data from the last 2-3 months. Is it possible to maintain the previous level of consumption with lower income? Generally speaking, yes. Simply tap into your own or other people's savings (via credit) and finance the gap created by the decline in real income. If interest rates are low and the shock is perceived as temporary, consumption smoothing is an obvious and easy solution for consumers.

So, do we see signs of consumption smoothing in the consumer sentiment data? Generally speaking, no – the postponement of important purchases is occurring exactly as one would expect given the level of interest rates, and there is no sign of a decline in Polish consumers' propensity to save. Therefore, we will continue to assume that 2026 will bring a slowdown in private consumption.

Financial markets update

No major changes at the end of last week. The PLN remains quite weak – against the euro, it's near the upper limit of the fluctuation band from the last three months. At the same time, the persistent weakness of the Polish currency argues against technical analysis. The pennant formation failed to materialize; EUR-PLN broke out of it sideways or even upwards, leaving us without directional signals in the market. From a fundamental perspective, the most important factor seems to have been the dollar appreciation, which has clipped the wings of the złoty and (generally) EM currencies. Nevertheless, it is clear that our region is not currently the main beneficiary of the opening of the Strait of Hormuz and may not be at all. This means that the potential for capital to return to local markets is limited, as it has not flown out.

For the FI market, the end of the week was rather dull – Treasury yields and swap rates remained unchanged… since the beginning of last week. The reaction to the US-Iran agreement marked the beginning of consolidation for key PLN interest rate benchmarks. In these circumstances, the most important and interesting event was last week's Treasury bond auction, which proved to be a resounding success. Will it be repeated this week? That's the most important question for the Polish market. In the meantime, we'll be monitoring macroeconomic data from the Polish economy. The most important of these concerns wage growth.