Citi Expect Less NBP Rate Cuts Due To Expansionary Fiscal Plan

Poland's FI space is getting some reprieve today (POLGB yields 4.2-5.7bp lower across the curve) after the publication of the 2024 budget draft with record borrowing needs applied some pressure starting on Friday. While fiscal matters are grabbing more attention during the pre-election period, market participants remain on the lookout for fresh clues on the NBP rate outlook, with the new spending plan providing a significant input to these considerations.

• In their weekly research note, Citi Handlowy write that the budget deficit target for next year (4.5% of GDP) exceeds the government's earlier forecast (3.4%) and market consensus (3.8%) but falls short of Citi's projection (4.8%). Still, they highlight some worrying details in the structure of the 2024 budget draft.
• Citi point out that the scope for a positive surprise in the 2024 budget deficit (which Poland has a solid track record of) is limited. They note that the Finance Ministry has corrected its forecasting model to account for so-called "natural" and recurring savings, i.e. slower than expected realisation of certain expenditures.
• At the same time, Citi believe that the government has pencilled in ambitious revenue targets. In their view, slowing inflation and the recent disappointing macroeconomic data may limit tax revenue. They write that achieving the VAT revenue target is possible only if the temporary VAT exemption on food items is cancelled.
• The hike in the VAT rate applied to food items will, in Citi's view, raise the inflation path in the NBP projection by around 1pp. Coupled with the expected increase in fiscal deficit, it will delay the return to the inflation target in the coming years. They expect the NBP to cut interest rates by end-2023 but warn that the scale of 2024 cuts may be smaller than the current market expectations.
• These comments come at a time when most desks are getting increasingly comfortable with the thought that the NBP will start cutting rates in September, while the FRA curve is pricing a fairly aggressive easing cycle going forward. Poland's 3x6 FRAs have printed fresh cyclical lows today, trading at the widest discount to 3-Month WIBOR (78bp) since 2012.