Poland: Wages explode - rate hike ahead

Wage growth in the Polish corporate sector accelerated significantly in March to 9.1% y/y, up from February ‘s 6.4% y/y. Today’s data was well above our forecast of 6.8% y/y and the consensus expectation of 6.2% y/y. This very strong rise in wage growth makes a rate hike of 25bp next week seem very certain.

Polish wage growth has actually been very subdued over the last couple of years, but this pronounced acceleration changes that picture dramatically. Unemployment has dropped considerably over the past couple of years and employment growth has been strong. Furthermore, emigration to other EU countries has been very noticeable since Poland joined the union in 2004. Clearly, these trends are now impacting wages. That being said, wage growth has hitherto been very subdued and productivity growth has been strong - and hence it is still too early to say whether the acceleration in wage growth will be particularly inflationary or a major concern in terms of Polish competitiveness. Still, there is certainly no reason to be complacent, and monetary policy will need to react. This is why we think a rate hike of 25bp, bringing the policy rate to 4.25%, at next week’s Monetary Policy Council meeting is a largely a given. This will most likely also be the consensus expectation - after today’s numbers. There is of course a chance that the rise in wage growth is due to some mysterious one-off factor, but this is most likely the real thing and we would expect wage growth to continue accelerating in the coming months.

We will be revising our forecast for Polish interest rates and the zloty in the wake of today’s data. We now doubt that our hitherto forecast of two rate hikes will be enough to stem the acceleration in labour pressures and therefore the outlook for the zloty has obviously become much brighter.

There is also a clear regional trend that should be noted here. Domestic demand has accelerated all across Central and Eastern Europe and the overheating “zone” is not far off in many of the new EU countries. The situation is worst in the Baltic States - where recent inflation numbers have surprised strongly on the upside - and in south eastern Europe, where the current account situation has deteriorated further in recent months.

The good news is that growth is strong all across Central and Eastern Europe (with Hungary as the only exception), but the bad news is that the composition of growth is worsening, as domestic demand is the main driver. Furthermore, strong domestic demand and accelerating wage growth right across the region means a gloomier outlook for the current account situation. This is true of most countries in the region, though it should be noted that Polish growth is more sustainable than that in, for example, Romania, Slovakia or the Baltic States. Growth becoming less sustainable in Central and Eastern Europe means the risk of more volatility in the CEE markets is increasing.

Source: By Lars Christensen Danske Bank A/S

www.fxstreet.com