Poland's Rating Under Pressure as Inflation Forecasts Rise and Bond Risk Premiums Hit a Record
S&P moved Poland's outlook to negative and Morningstar DBRS cut its rating to A-. The central bank raised its inflation forecast, and ING sees further weakness in Central European currencies.
- S&P revised Poland's rating outlook to negative, and Morningstar DBRS downgraded Poland's long-term foreign-currency rating from A to A-, with a stable outlook. m:…4373
- The National Bank of Poland forecasts CPI inflation at 3.8 percent year over year in the fourth quarter of 2026, up from 3.2 percent in its July projection, and at 4.6 percent in the first and second quarters of 2027, up from 2.9 percent. m:…4373
- The 10-year bond asset swap spread reached 114 basis points, the highest level on record, while EURPLN closed at 4.39 at the end of the week. m:…4373
- Monetary Policy Council members Marcin Zarzecki and Henryk Wnorowski said the probability of interest rate hikes in the coming months has increased significantly; Wnorowski would favor a hike as early as December, while Zarzecki would rather wait until after the New Year. m:…4373
- ING's models point to further weakness in Central European currencies, its analysts say the dollar rally requires the risk-off mood to persist, and they estimate EUR/USD is undervalued by 2.1 to 2.3 percent. m:…7100
Two rating actions in one week
Poland's sovereign credit profile came under strain from two directions at once. S&P changed Poland's rating outlook to negative, and Morningstar DBRS downgraded Poland's long-term foreign-currency rating from A to A-, with a stable outlook. m:…4373
The market reaction showed up in bonds more than in the currency. The asset swap spread, reflecting the risk premium on Polish bonds, widened to 114 basis points for 10-year securities, the highest level on record. The zloty held up better: EURPLN closed at 4.39 at the end of the week. m:…4373
The central bank's new inflation path
The National Bank of Poland has significantly increased its CPI inflation path. Inflation is forecast at 3.8 percent year over year in the fourth quarter of 2026, against 3.2 percent in the July projection, and at 4.6 percent year over year in the first and second quarters of 2027, against 2.9 percent previously. m:…4373
Monetary Policy Council members Marcin Zarzecki and Henryk Wnorowski said the probability of interest rate hikes in the coming months has increased significantly. The two disagree on timing: Wnorowski would favor a hike as early as December, while Zarzecki would rather wait until after the New Year. Meanwhile, Finance Minister Andrzej Domanski announced that within 10 days he will present measures aimed at counteracting rising fuel and gas prices, and the Ministry of Energy submitted a proposal for a maximum gas price for households and selected customer groups. President Karol Nawrocki appointed Marta Kightley, Przemyslaw Litwiniuk, Ludwik Kotecki and Marcin Zarzecki to the National Bank of Poland's Management Board. m:…4373
Currencies feel the strain
The pressure is not confined to Poland. ING's analysts say that in their models, narrower rate differentials and a stronger US dollar point to weaker Central European currencies once again, leaving them generally bearish. The dollar rallied on contagion from AI-related equity selloffs and then on strong US payrolls of 165,000, ING says, and its analysts think the rally requires the risk-off mood to persist this week. m:…7100
ING estimates short-term undervaluation in EUR/USD of around 2.1 to 2.3 percent. It expects October US CPI at 0.3 percent month on month for both headline and core, and notes 19 basis points priced in for a December Federal Reserve hike. Romania's October inflation is expected to rise to 6.9 percent, market pricing implies roughly one and a half rate hikes for the Czech Republic, and ING expects the Bank of England to hike again in February. m:…7100
Mizuho's November outlook adds to the picture of a strong dollar and a pressured euro. Its analysts expect the euro-dollar pair to keep moving lower this month on French fiscal and political instability, and see USD/JPY trading in a range of 155.00 to 160.00 in November. The Federal Open Market Committee kept its policy rate at 3.75 to 4.00 percent when it met in October, the Bank of Canada lifted its policy rate from 2.25 percent to 2.50 percent on October 28, the Bank of Japan kept its policy rate at 1.25 percent in October, and the Bank of Korea kept its rate at 3.00 percent on October 22. Attention this month will focus on the US midterm elections on November 3, Mizuho notes. m:…5703
What is still unresolved
- The specific timing of the next Monetary Policy Council interest rate decision
- The final impact of the proposed maximum gas price measures on the fiscal deficit
- Whether the Bank of England proceeds with a February rate hike
- The impact of US midterm election results on fiscal policy and interest rates
- The future of French fiscal policy and budget approval
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