energy carriers

Poland’s inflation may fall to single digits in August but pace of disinflation to slow The final CPI print for June confirmed that inflation slowed to 11.5% year-on-year from 13.0% in May. We estimate that core CPI fell to 11.1% YoY from 11.5% a month prior. We see further deceleration ahead, likely allowing the MPC to cut rates in September and October.   Prices of goods rose by 11.4% YoY, and service prices by 11.7% YoY, compared with 13.3% and 12.3%, respectively, in the previous month. The biggest contributors to further disinflation in June were the deepening of the decline in fuel prices, the slowdown in the growth of prices of energy carriers, and the slightly slower growth of food prices compared to a month ago. These factors lowered the annual inflation rate in June by about 1.1 percentage points relative to May. For the second month in a row, consumer prices did not change significantly vs. the previous month. Core inflation declined markedly again and according to our estimates eased to about 11.1% YoY in June vs.11.5% in May. However, the months of rapid disinflation are behind us. Since the peak in February, CPI inflation has declined by nearly seven percentage points. We expect the disinflation process to continue, but its pace in the second half of the year will be slower, due to, among other things, a somewhat smaller drag from the reference base. In July, we may see a decline in prices relative to June and we may see the annual inflation rate at single-digit levels as early as August. The Monetary Policy Council has officially ended the cycle of interest rate hikes and is preparing for rate cuts, which, according to recent announcements by the National Bank of Poland President Adam Glapinski, may take place as early as after the summer holidays. This is also our baseline scenario, assuming rate cuts in September and October (both by 25bp). At the same time, the NBP's July projection indicates that even in the absence of interest rate changes, inflation will take a long time to return to target so the space for rate cuts seems limited. The market-priced scale of monetary easing may prove too aggressive.

As part of ING Bank's project with the European Economic Congress in the first quarter of this year, journalists of the WNP.pl portal conducted 19 in-depth interviews with managers of Polish companies from various industries and two chambers of commerce (Scandinavian and Italian) operating in Poland. The report, titled: "The Response of Polish Business to the Energy Shock. Prospects for energy investments" reflects the voice of business and the reaction of companies to the energy shock. We have also gathered suggestions for changes in energy investments.   Price shock and searching for energy independence Russia's invasion of Ukraine and restrictions on Russian energy imports have led to an energy price shock in Europe. All Polish companies were affected by this situation, and some of them reacted proactively. Due to the energy "shields," especially for small businesses, the increase in energy prices varied widely across EU countries. The decisive factor was the size of the company and the value of its annual consumption. For example, in the second half of 2022, natural gas prices for companies in Poland consuming no more than 1 TJ (terajoule) of gas per year fell by 10% compared to the second half of 2021, while for the consumption range between 10 and 100 TJ, they rose by almost 90% over the period. Average increases in gas prices for companies last year varied depending on the volume of consumption in other countries as well, for example, in Germany very markedly – from 24% to almost 90% year-on-year.   Natural gas prices   The scale of the shock at the company level, among other things, depended on the energy intensity of production processes and the energy carriers used. Companies have made efforts to improve energy efficiency (to use less energy in production activities) or to build their own renewable energy sources (an attempt to become partially independent from the electricity from the grid). About 80% of the total energy in Polish industry is consumed by a total of six sectors: non-metallic minerals, chemicals and petrochemicals, food, iron and steel, paper and wood.   Energy consumption by sector         Our report summarises the business response to expensive energy and the significant risks of energy shortages, particularly natural gas in 2022. In the publication, we also answer the questions: What is holding back energy investment in Poland?  What can segmentation of the energy market caused by differentiated public support – depending on the size of the company – lead to?  What are companies' expectations for prices and availability of energy carriers in 2023?  What will Poland's energy mix be in two decades?  Why is greening and ESG criteria not a fad, but a necessity for maintaining competitiveness and cooperation in global supply chains?    We need to speed up the energy transition In energy investments, companies have not infrequently encountered regulatory barriers, and have often bumped up against the inadequacy of power grids to accommodate more distributed energy sources. In the report, we emphasise the need to accelerate the expansion and modernisation of distribution and transmission power grids as a sine qua non for investments in zero-carbon generation sources: RES and nuclear. Investment in renewable energy has increased significantly in recent years. In 2022, we had more than 9 GW of capacity in photovoltaics, compared to just over 1 GW in 2019.   New capacity installed   Polish business is vocal about the need to accelerate the expansion and modernisation of distribution and transmission power grids as a prerequisite for investment in zero-carbon generation sources. Renewable and nuclear energy are expected to be key elements of Poland's energy mix in two to three decades. Beyond that, electrification remains key to decarbonisation by 2050. In the coming decades, electricity-based technologies will gradually replace current energy carriers in transportation (electric vehicles), industry (e.g. electric arc in metallurgy) or buildings (e.g. heat pumps).   Tandem power generation and grids We saw what an unequal tandem, i.e. RES development without a corresponding increase in grid investment, can lead to already in late April. In an environment of lower demand for electricity, it was RES power that was being blocked by the system operator. Coal or gas-fired power plants cannot be flexibly switched on and off. Such a situation is economically inefficient and environmentally disadvantageous. It's high time to accelerate investments in distribution and transmission networks so that the power and grid tandem will smoothly lead Poland towards a low-carbon future.  

The net short position in USD grew by $490 million to -$16.272 billion over the reporting week after a strong correction a week earlier. The decline is largely related to long positions on the euro, and in terms of other major currencies, the notable trend is selling across all significant commodity currencies (Canadian, Australian, New Zealand dollars, and also the Mexican peso). The yen and franc are slightly doing better, i.e., there is demand for safe-haven currencies and a sell-off in commodity currencies. Since long positions in gold have decreased by $4.5 billion, we can expect increasing demand for the US dollar.     PMIs for the eurozone, the UK, and the US will be published on Wednesday, which can significantly influence the rate forecasts of the European Central Bank, the Bank of England, and the Federal Reserve. Last week, we witnessed a clear uptrend in bond yields, suggesting increased demand for risk amid more upbeat economic reports. At the same time, we see a sharp deterioration in China's economy, which, on the contrary, points to slowing demand. This dilemma may be resolved after the release of the PMIs, so we can expect increased volatility.   EUR/USD The final estimate confirmed that the euro area annual inflation rate was 5.3% in July 2023, with core inflation unchanged at 5.5%. Since there are no seasonal factors that could explain the price increase at the moment, it would be best to assume the most obvious explanation - price growth is supported by broad price pressures in the growing services sector. Stubborn inflation supports market expectations that the ECB will raise rates in September, and this increase is already reflected in current prices. The strong labor market is also in favor of a rate hike. After a sharp decrease a week earlier, the net long position in the euro grew by $1.275 billion, putting the bearish trend into question. The settlement price is below the long-term average, giving grounds to expect a continuation of the euro's decline, but the momentum has noticeably weakened.   A week earlier, we assumed that the bearish trend would continue. Indeed, the euro consistently passed two support levels, but did not reach the 1.0830 level. The resistance at 1.0960, which the euro can reach if a correction develops, is still considered in the long term. We assume that the trend remains bearish, and the 1.0830 level will be tested in the short term. GBP/USD Inflation in July fell from 7.9% to 6.8%. This is mostly due to the fall in the marginal price of OFGEM (Office of Gas and Electricity Markets) from 2500 pounds to 2074. Without this decline, inflation would have still fallen, but much less - to 7.3%. Despite the sharp decline, inflation remains at a very high level, and further falls in the marginal price of energy carriers are unlikely. The NIESR Institute suggests that, among the possible scenarios for future inflation behavior, we should choose between "very high", assuming an average annual inflation of around 5% over 12 months, and "high persistence", which is equivalent to an annual level of 7.4%. Needless to say, both scenarios imply inflation higher than in the US, so the likelihood of a higher BoE rate remains, leading to a yield spread in favor of the pound. These considerations do not allow the pound to fall and support it against the dollar, while against most major currencies, the dollar continues to grow. After three weeks of decline, the long position in GBP grew by $302 million to $4.049 billion. Positioning is bullish, the price is still below the long-term average, but, as in the case of the euro, an upward reversal is emerging.       In the previous review, we assumed that the pound would continue to decline, but UK inflation pressure remains stubborn, which changed the rate forecast and supported the pound. A correction may develop, and the nearest resistance level is 1.2813. If the pound goes higher, the long-term forecast will be revised. At the same time, we still consider the bearish trend, and the chances of restoring growth are high, with the nearest target being the support area of 1.2590/2620.