Poland is taking centre stage in the CEE region this week and next. Yesterday, the Minister of Finance presented the state budget for next year, when public finances are expected to reach a deficit of 6.5% of GDP. At the same time, this year’s deficit was revised from 6.3% to 6.9% of GDP. Although the state budget deficit will be lower year-over-year, net borrowing needs will be higher than this year, which also suggests higher bond issuance. We highlighted this risk yesterday, and the market quickly responded with a sell-off, most visible in the bond market. Although FX avoided significant pressure, we can see some consequences today.

Today, August inflation figures will be released in Poland, where we expect a decline from 3.1% to 2.9%, in line with market expectations. The budget and inflation should be key topics for discussion at the National Bank of Poland meeting next week. Although fiscal policy is not such a problem that it would jeopardise the September rate cut, it will certainly play a role for the rest of the year. Two MPC members in recent days have mentioned that September may be the last cut this year, and one of the reasons is the excessive deficit. However, the market still expects at least two rate cuts this year and more next year. Therefore, we see any weakness in the zloty today as an opportunity for new long positions ahead of next week’s central bank meeting.

In the Czech Republic, the second GDP estimate for 2Q will be released today. Our baseline expectation is confirmation of the flash estimate of 2.4% YoY, but we see some chance of an upward revision based on weaker-than-expected growth and strong monthly figures. The Czech National Bank expected 2.7% in its August forecast. Any narrowing of the deviation would only support a hawkish stance here. Still, we believe this is just one piece of the puzzle in the hawkish picture. Another is wage negotiations, where talks between the government and unions have been postponed until Wednesday next week. However, it seems that in any case, the increase in public sector wages should exceed the CNB’s forecast. Overall, we remain bullish on the CZK, and EUR/CZK should return below 24.500.

Frantisek Taborsky