CEE Macro Weekly: Renewed mandate, debt rising

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TOP MACRO THEME(S):

• Europe feels let down by its oldest ally (p. 3) – A looming 50% US tariff on EU imports threatens to ignite a transatlantic trade war, with stark economic consequences for Europe, moderate fallout for CEE, and a chilling effect on global growth forecasts.

WHAT ELSE CAUGHT OUR EYE:

• CEE: Inflation in May turned out above our expectations for most of the CEE countries, however, it has not altered much our view on the monetary policy outlook for the region. Meanwhile final reading of May inflation in Poland was marginally lower than the initial estimate by Statistics Poland (more on p.2).
• POL: Prime Minister D.Tusk’s (Civic Coalition) government won a vote of confidence (243 for; 210 against) after he asked for it following the presidential election loss. In his speech, D.Tusk announced an upcoming cabinet reshuffle but gave no guidance on economic issues. President-elect K.Nawrocki (ind. backed by Law and Justice) declared support for a potential bill raising the income tax-free allowance from PLN 30k to PLN 60k (Civic Coalition 2023 election promise; estimated cost of up to 1.5% of GDP).
• POL: Public debt rose in 1q25 to 57.4% of GDP from 55.3% of GDP in 4q24 – an increase of 2.2pp q/q (PLN 112.2 bn), among the highest outside crisis periods. This follows a 2.0pp q/q rise in 4q24. The increase was driven mainly by central government borrowing (military contracts, RRF loans and liquidity management), while local government debt declined. The sharp debt rise suggests fiscal consolidation has not started yet and the deficit has likely widened further in 1q25 (from 6.6% of GDP in 2024). Public debt could exceed 60% of GDP even this year, though this is not our baseline scenario. Fiscal pressures remain high and are a key reason behind MPC’s relatively hawkish stance.
• POL:L.Kotecki (MPC member) said he still sees room for a total of 75pb rate cuts in 2025, starting in July and followed by moves in September and November. He noted that, as of June, most MPC members were unconvinced about a July cut, but the upcoming inflation projection might shift that view. L.Kotecki remains the most dovish MPC member. We expect two 25bp rate cuts in 2025 – in September and November.
• POL: Job vacancy rate fell in 1q25 by 9.8% y/y to 101k, continuing a downward trend that began in early 2022. The data point to a further mild cooling of the labour market, in line with a slightly rising unemployment rate according to the LFS (3.3% in April 2025). We expect the emerging economic recovery to reverse this negative trend.

THE WEEK AHEAD:

• Globally, this will be an important week with several central bank meetings, including the Fed (Wed.). In contrast, the CEE region will see few key data releases, and Poland enters a “long weekend” with a public holiday on Thursday. The calendar is dominated by Polish data: core inflation (expected to remain stable) on Monday and consumer sentiment (likely to show further improvement) on Wednesday.