Zloty Continues To Trade On Back Foot Amid Debate On Implications Of Fiscal Measures

EUR/PLN continues to unwind its oversold conditions and last trades +258 pips at PLN4.5426, with the zloty lagging all its EMEA peers save for the Hungarian forint. POLGBs are slightly weaker across the steepened curve, with core FI space also showing weakness.

• Fiscal measures announced by the ruling party as their campaign pledges have sparked a polarising debate this week, pushing Poland's FRA curve higher and prompting some sell-side desks to flag a diminished risk of NBP rate cuts by the end of this year. On top of that, MPC's Ludwik Kotecki (hawkish dissenter) said that new spending could boost CPI inflation by 2pp and delay monetary easing until end-2025.
• By contrast, MPC's Henryk Wnorowski earlier this week played down the potential of the new measures to have much impact on inflation, albeit he conceded that there could be some mild inflationary impulse. Elsewhere, JP Morgan wrote that "the real risk was that the government went all in this year, which so far is not the case," in contrast with "last year's fiscal bonanza in Hungary" or "the Czech Republic in 2021."
• However, JP Morgan see a bigger fiscal challenge from military spending. They expect that pre-election generosity and energy subsidies will fade, especially given Poland's solid fiscal track record. However, beefing up defence capabilities is a strategic objective and may structurally worsen Poland's budgetary position.