Economic news

• NBP-OPINION: The Monetary Policy Council is not committed to any immediate action; the economy remains resilient, and inflation is within the central bank’s tolerance band, according to NBP President Adam Glapiński. In his view, long-term inflation expectations remain well anchored, and monetary policy is restrictive compared to the post-pandemic period.
• INFLATION: Core inflation excluding food and energy prices stood at 3.0% yoy in April, up from 2.7% yoy a month earlier, according to the National Bank of Poland. The reading was a slight upside surprise relative to our forecast of 2.9% yoy.
• LABOR MARKET: Wage growth decelerated more sharply than expected – wages rose by only 5.4% yoy in April, the slowest pace in five years. At the same time, employment dynamics remain persistently negative at 0.9% yoy in April, and the cumulative contraction in employment this year is broadly in line with previous years, suggesting a continued downsizing process in the enterprise sector. These data support our negative assessment of the domestic labour market and our forecast of subdued nominal wage growth. We elaborate on this topic in a separate commentary.
• INDUSTRY: Following a strong March, industrial production slowed to 3.1% yoy, slightly below expectations of a 4.2% yoy increase. Meanwhile, construction and assembly output accelerated to 4.5% yoy, landing midway between the market consensus and our forecast. Output has already recouped the losses observed at the beginning of the year and should gain further momentum in the coming months. We discuss industrial and construction data in more detail in a commentary available on our website.
• AUCTION: The Ministry of Finance sold six series of bonds last week for a total of PLN 10.1 billion (including supplementary sales), against demand of PLN 13.3 billion. Moreover, the Ministry announced the pricing of three tranches of Swiss franc-denominated bonds (3-year, 7-year, and 10-year) with a total value of CHF 885 million. The bonds were issued at spreads of 50–90 basis points over the mid-swap rate. This marks the first CHF-denominated issuance since 2015.
• SENTIMENT: Consumer sentiment in Poland improved in May - the current consumer confidence index increased by 2.8 points mom, while the leading indicator rose by 2.7 points mom.
• DEBT: State Treasury debt at the end of April 2026 increased by PLN 38.1 billion (+1.9% mom) to approximately PLN 2.09 trillion, according to preliminary data released by the Ministry of Finance.
• FUEL PRICES: A decision regarding the potential further extension of the fuel price mitigation package is expected this week, Energy Minister Miłosz Motyka said. In his view, once oil prices return to their early-March levels and the situation in the Middle East stabilises, it will be possible to begin a gradual phase-out of the CPN programme.

Risk premium raises the cost of capital in Poland

Tensions in the fixed income (FI) market and the global rise in sovereign bond yields are arguably the most important market trend at present. Investors fear that the prolonged conflict in Iran may strengthen inflationary pressures and force major central banks to tighten monetary policy further. There is also a risk that the sell-off in government bonds could trigger declines in equity indices as well (Bank of America argues that a correction may arrive as early as June). Unfortunately, the Polish FI market is also experiencing a troubling increase in yields; as recently as Tuesday, the yield on 10-year Polish Treasury securities exceeded 6%, reaching its highest level in nearly three years.

In our view, however, the key driver behind the rise in Polish government bond yields is not so much expectations of policy rate hikes (as is the case in core markets), but rather an increase in the risk premium. In today’s analysis, we therefore examine the less obvious consequences of rising risk premia in an environment of a relatively stable expected interest rate path.

10-year Polish Treasury yield relative to the NBP reference rate

Source: Macrobond, Pekao Research

Let us begin with the simple observation that the outbreak of war in the Middle East in March this year led to a pronounced increase in yields on Polish 10-year bonds (by approximately 100 bps). This occurred despite a 25 bps reduction in the NBP reference rate during the first days of the conflict. As a result, the yield on 10-year Polish government bonds (POLGBs), with the NBP policy rate currently at 3.75%, is now similar to the level observed one and a half years ago, when NBP rates were 200 bps higher.

More broadly, PLN market interest rates have risen by 86–140 bps since the outbreak of the war in Iran, with the strongest increase occurring at the short end of the curve, while yields on Polish Treasury securities have risen more sharply than IRS rates.

Market interest rates in Poland: spot and forward rates (IRS)

Source: GPW Benchmark, Macrobond, Pekao Research

Expectations regarding future Monetary Policy Council (MPC) decisions explain a significant part of this move. Our baseline scenario assumes that, given the weak labour market and the closed output gap, the MPC will keep interest rates unchanged through the end of 2027. However, many investors continue to price in monetary tightening. The maximum expected scale of such tightening is reflected in the 2-year IRS, which currently prices in two rate hikes (whereas prior to the war the market had priced in modest rate cuts). How, then, can the remaining portion of the yield increase (approximately 25 bps) be explained?

Asset swap rates as a measure of risk premium in selected CEE countries

Note: Series smoothed using a 12-month moving average.

Source: Macrobond, Pekao Research

In our opinion, the missing piece of the puzzle is the rising risk premium. This is typically measured using so-called asset swaps, i.e. the spread between the yield on Treasury securities and the IRS rate of corresponding maturity. The chart above clearly shows that since the outbreak of war on Poland’s eastern border, the risk premium in Poland has increased from around zero by nearly 100 bps, including approximately 25 bps since the beginning of military operations in Iran.

The investment risks for which investors demand an additional premium on Polish assets are numerous and diverse. In particular, we refer to:

• The absence of a credible fiscal consolidation path: concerns regarding the state of public finances naturally weigh on the bond market. In an environment of externally driven (or, in economic jargon, exogenous) increases in yields, a self-fulfilling dynamic may emerge: higher sovereign yields translate into higher debt servicing costs, and investors, recognizing this risk, demand even higher returns on government debt securities.
• Hawkish ECB communication: markets are convinced that the ECB will raise interest rates as early as next month (a forecast with which we agree). A narrowing of the interest rate differential between Poland and the euro area could trigger capital outflows from Poland; to counteract this, returns on PLN-denominated assets would need to increase.
• Global risk aversion: in an environment of mounting geopolitical tensions, scepticism toward investment outside core markets is understandable. Admittedly, with respect to the consequences of the war in Iran, Poland is not among the countries most exposed to risk - the country benefits from diversified sources of crude oil and natural gas supply, a high share of services in value added, and significant geographical distance from the military theatre. Nevertheless, with the war in Ukraine ongoing and the conflict in Iran escalating, a degree of caution among investors should be expected.

Financial market update

The end of last week was marked by a thaw across domestic asset markets: yields on Polish Treasury securities declined, the PLN appreciated, and the main equity indices on the Warsaw Stock Exchange moved higher. This was largely driven by favourable external conditions, including lower oil prices and a decline in long-term interest rates globally. Although a correction over recent days has been noticeable, it can hardly be described as significant. At the same time, the past week clearly demonstrated that domestic data currently carry little weight - global market sentiment is the dominant driver, translating almost one-to-one into investor attitudes towards PLN-denominated assets. Will domestic factors regain relevance this week? There are two potential opportunities: the flash estimate of CPI inflation for May scheduled for Friday, and the Treasury bond auction due on Thursday.