Recession Risks Are Rising Amid Growing Concerns About Yield Curve Inversion

• In the past few weeks, the aggressive tightening cycle run by the NBP has led to a sharp flattening of the yield curve, which is down nearly 130bps since the beginning of October and is currently trading at 21bps (lowest level since January 2009).
• We have seen that the NBP board has switched from a super-dovish stance, with the majority of policymakers aiming to keep interest rates low until the end of Q1 2022, to strongly hawkish.
• NBP surprised the market in its last two meetings, raising the policy rate by 40bps last month (vs. no change expected) and again hiking by 75bps last week (vs. 25bps exp.).
• The constant positive surprises in inflation have 'pushed' Polish policymakers to start a tightening cycle; however, the uncertainty over the economic outlook remains elevated in the near to medium term.
• We have seen that CEE governments have reintroduced new Covid restrictions to limit the downside risk of a fourth wave of infections this winter, which could lead to a significant downward revision in growth expectations.
• Could further flattening (i.e. yield curve inversion) indicate a potential recession coming ahead in Poland?
• This chart shows that the 2Y10Y yield curve has historically led industrial production by 6 months. (we smoothed the 2021 April/May Industrial Production due to the base effect).

Source: Bloomberg/MNI