Inflation at the centre of attention of Polish economy. Preparing the budget for an economic downturn also important in the coming months.

Neither the Monetary Policy Council nor the European Central Bank is in a hurry to tighten the monetary policy. Still, inflation is soon going to become the most important subject in the Polish economy. It is the sustainability of public finances when faced with an economic downturn that will matter in the long term. This is not likely in near future as economists agree that economic growth is going to remain at over 4 percent both this year and next year.

“It seems that in the foreseeable future economic discussions in Poland will focus on inflation, whether it will increase and at what pace. It’s also going to influence the eventual attitudes of the Polish central bank,” Mateusz Walewski, Chief Economist at BGK, told the Newseria Biznes news agency. “So far, our policy has been very dovish. In March the Monetary Policy Council was even more dovish than before, so if inflation doesn’t start to increase quickly, we can expect this attitude to continue. If inflation begins to rise, threatening to break through the inflation target, then the approach of the Monetary Policy Council will change and it will become more and more hawkish.

The last time that the Monetary Policy Council adjusted interest rates was more than three years ago, on 5 March 2015, and it was a reduction. The last interest rate rise happened in May 2012 and that decision was unexpected and met with a lot of criticism. It was followed by a series of ten reductions.

Inflation reappeared on the Polish market in December 2016 and since then it has reached the inflation target of 2.5 percent only once. According to NBP projections the average annual inflation rate in 2018 will be only slightly higher than the previous year’s and will amount to 2.1%. In 2019 it is expected to rise to 2.7 percent and in 2020 – to 3 percent. These are still values covered by the margin of the inflation target (+/- 1 percentage point). Due to this, nobody is expecting a rise in the interest rates this year, although everybody will definitely pay close attention to the prices.

“If we look at the state of things in the longer run, the economy will largely rely on the fiscal situation. The current fiscal climate is very good, with the budget deficit in decline, and increasing tax revenues, particularly thanks to the narrowing of the VAT gap. However, the question how the fiscal situation will be influenced by a potential downturn and whether we’ll be able to maintain the good results or not, remains open,” Mateusz Walewski stressed. “The second important issue ahead of us, after inflation, will be the sustainability of the fiscal situation, but everything seems to be going in the right direction now.”

In 2017 the state earned PLN 350.5 bn in budget revenue, which is 7.7 percent more than expected. Revenue from taxes exceeded the plan by 4.7 percent, with better-than-expected results for all taxes except for excise tax, which yielded a slightly lower result (by 1.1 percent). Budget expenditures amounted to nearly PLN 375.9 bn and were 2.3 percent lower than those estimated in the Budget Act. The deficit amounted to nearly PLN 25.4 bn, which is even less than half the value projected in the Act. However, all this is happening during an economic boom, not only in Poland, but also among our trade partners, mainly in the euro area.

“Most experts agree that the annual rise in Polish GDP will be over 4 percent this year and probably next year, when it might be slightly slower, but at a similar level. This is the common point in which there aren’t many differences in our forecasts,” BGK’s Chief Economist stated. “Obviously the economic growth in Europe will benefit from the ECB’s dovish approach, so we should expect that this will continue – the longer the economic upturn is maintained in Europe, the longer it stays in our country.

In March there was no change in the policy of the European Central Bank, but observers noticed the fact that its communication now lacked the information on its readiness to increase quantitative easing (purchasing government securities, which provides support to economies) in the future. However, a statement from ECB’s President Mario Draghi softened this message a bit, and this was further supported by lower inflation forecasts for the euro area.