CEE Macro Weekly: Central banks in the grip of (geo)politics

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TOP MACRO THEME(S):

• Favourable inflation data overshadowed as geopolitical risk delays monetary easing (p.3) – despite recent favourable inflation prints rising geopolitical tensions and commodity price risks are skewing the CEE macro outlook to the downside, delaying the timeline for monetary easing.

WHAT ELSE CAUGHT OUR EYE:

• POL: President K.Nawrocki announced in an address that he will not sign the act on the Security Action for Europe (SAFE). The justification for the presidential veto relates to concerns about transferring state defence competences to the EU under the conditionality mechanism. K.Nawrocki also pointed to the risks associated with taking on long-term loans in foreign currencies. The President’s veto does not mean that funds from SAFE will not be used - last week Prime Minister D.Tusk signalled that work is underway on a “Plan B.” According to earlier reports, the government’s plan assumes that funds from the EU SAFE programme would be channelled into the Armed Forces Support Fund. However, this solution would deprive the police, fire service and border guard of PLN 7bn in funding (out of around PLN 186bn for the entire programme). As an alternative proposal (“Polish SAFE 0%”), the President has submitted to parliament a draft law on the Polish Defence Investment Fund, which would be a new fund within BGK (Polish development bank) aimed at financing the technical modernisation of the Armed Forces, defence projects and infrastructure investments. The fund would be financed primarily from NBP profits, as well as from loans and bonds issued on both domestic and international markets. The draft law proposes an amendment to the NBP Act so that transfers from NBP profits – previously directed to the state budget – would instead flow into the Polish Defence Investment Fund. The presentation of the proposal indicates that the projected size of the fund would be at least PLN 185bn, although it remains unclear how these resources would be generated in terms of structure, or whether and how the rules governing the management and accounting of NBP reserves would change. Governor of the NBP, A.Glapinski, indicated that the central bank holds around PLN 197 billion in unrealized gains resulting from the increase in the value of its gold holdings. However, he noted that due to the government’s lack of interest in this proposal, the NBP will not, for the time being, begin active management of its gold holdings.

THE WEEK AHEAD:

• The CNB meeting will be in focus next week and is not expected to bring any change in interest rates. However, we will be looking for an initial CNB assessment of the impact of the geopolitical shock on the inflation outlook.
• Beyond that, the calendar includes a series of February activity data releases from Poland. In our view, construction output will remain strongly affected by adverse weather conditions, while geopolitical uncertainty will weigh on consumer sentiment. On Friday, Moody’s will announce its decision on Poland’s sovereign rating (A2, negative outlook). Unlike Fitch’s recent economic outlook, Moody’s forecasts are expected to take into account the impact of the war in the Middle East. An agency analyst indicated that if the conflict proves to be short-lived, its impact on the economy will likely be limited.