BNY’s Geoff Yu argues that Euro strength is amplifying import price pass-through risks for Poland, with EUR/PLN gains feeding into higher import prices. The Monetary Policy Council’s guidance of unchanged rates contrasts with market pricing for a return above 4%. Yu sees Poland as facing the clearest hawkish risk in Central and Eastern Europe, making expectations for rate cuts increasingly vulnerable.

Polish import prices pressure NBP stance

“The benign outlook may lead to unintended consequences. A stronger euro and reflation are normally healthy, but in the near term, risks exacerbate some of the inflation risk arising from supply shocks. Due to supply chain linkages, pass-through remains very strong across Europe, and recent moves in the euro lead to some additional hawkish risk in policy pricing.”

“For example, Poland has not enjoyed the “re-rating shock” in Hungary, which generated policy-neutral inflows. The latest data show that between March and May, import prices have increased materially even without significant upward moves in EUR/PLN. The risks of a further gain through Q3 are stronger, as EUR/PLN has made significant gains.”

“The current policy setup faces challenges. The Monetary Policy Council envisages no change in interest rates for the rest of the year, but forward pricing suggests rates need to move back above 4%. Much will hinge on the ECB.”

“It is manageable for the NBP to allow for June’s precautionary move, but the risk of a more sustained cycle will require a catch-up. Meanwhile, fiscal impulse remains strong, which can amplify domestic demand, a dynamic that is not helpful in a rising import price environment. At the very least, cuts need to be taken off the agenda entirely.”

“Position for greater NBP and Riksbank vigilance. Take Polish cuts off the table, favor earlier Riksbank tightening, and treat further upside in EUR/PLN and EUR(SEK as increasingly self-limiting.”