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USD/JPY: Japanese Authorities Signal Intervention Amid Rapid Currency Appreciation

GDP results for the first quarter were a positive surprise, signalling economic resilience in the second quarter. This makes the situation easier for central banks. Policymakers are cautious, however, given the already high level of rates. We believe a continued rise in inflation will soon restore the hawkish view


Poland: GDP posted a strong positive output gap at the beginning of 2022

In the first quarter, the Polish economy accelerated despite the Russia-Ukraine war, growing by 8.5% year-on-year and 2.5% quarter-on-quarter. But we think this is the cyclical peak. The following quarters should bring a slowdown to ca. 2% YoY in the fourth quarter. So far, manufacturing has been driven by backlogs, but the PMI shows a strong contraction in new orders. The high contribution of inventories (ca. 7ppt) is not sustainable. Investment may also suffer from uncertainty though consumption should slow only marginally given the massive fiscal stimulus (mainly spent on social transfers and tax cuts) and spending on hosting Ukrainian refugees. The high starting point implies that average annual GDP growth should be about 4.7%.

Both the robust dynamics and GDP structure make the inflation picture even worse. The positive output gap has widened. We see strong evidence that the external supply shock is causing widespread second-round effects. Companies are seeing strong demand and are passing higher commodity and energy costs on to retail prices. As a result, core inflation has grown by about 1ppt for a fifth straight month. We see CPI peaking in 4Q22 at 15-20%. Our models show that the process of passing higher costs on to retail prices may last until the end of the year. Even if GDP slows, as we predict, this should not cause unemployment to rise while the output gap will likely go from strongly positive to neutral rather than negative.

The policy mix is hardly helping inflation. The National Bank of Poland keeps raising rates but on the fiscal side, new programmes have been added, with fiscal stimulus likely reaching 3% of GDP this year. This raises the risk of persistent inflation, which the NBP should contain with further rate hikes. We see the terminal rate closer to the upper bound of our range at 5-10%. Our target is 8.5% to be reached at the end of 2022.

Czech Republic: CNB shifts to dovish tone despite rising inflation

Economic growth in 1Q surprised positively. Moreover, the second estimate brought a further upward revision to 0.9% quarter-on-quarter and 4.8% year-on-year. The surprise came mainly from the investment and inventory formation component. The overall picture is thus better than expected, reducing the risk of recession for the next two quarters. April inflation surprised on the upside again and was 0.4ppt higher than the central bank's forecast, rising to 14.2% YoY. We have thus once again raised our peak forecast to around 16% mid-year, pushing the level of inflation safely above 10% at the end of this year. Energy and fuel prices remain the main drivers, but the entire core component is also rising. On top of that, the largest energy supplier announced another price increase, signalling the start of a third round of price hikes. This assures us that the downward path of inflation will be very slow in the second half of the year.

The appointment of a new Czech National Bank governor has brought a change in stance, with the Bank shifting to a dovish tone having traditionally been the biggest hawk in the region. This signals the impending peak of the tightening cycle. We expect the June meeting to deliver the last 100bp rate hike to 6.75%. However, at the moment we still don't know the composition of the board after 1 July, which will play a key role in the future monetary policy direction. On the FX side, the CNB has been intervening in favour of the koruna since mid-May. Although no details have been published, we think the intention is to prevent the koruna from weakening above the 25.0 EUR/CZK level. This may change quickly with the new board composition, but we believe a shift to a dovish stance will require much more frequent central bank market activity if the CNB is serious about taming inflation.

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USD/JPY: Japanese Authorities Signal Intervention Amid Rapid Currency Appreciation

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