Economic growth in Q2 higher than predicted
The economic growth rate reached 5.8% y/y in Q2. The figure is only slightly lower than the 6.1% y/y recorded in Q1 while the market consensus and our projection was 5.6% y/y. The main driver behind the economy was domestic demand. It increased by 6.2% y/y while the contribution of net exports was negative at -0.6 percentage points. Allowing for seasonal factors, the growth rate was 6.1% in Q2 against 5.7% in Q1, confirming the good condition of the Polish economy. Private consumption was the main component of domestic demand. It rose by 5.6% y/y, although its contribution slightly diminished. But the contribution of investment increased to 2.9% percentage points. This structure of domestic demand is good for medium-term inflation prospects because it means lower upward pressure on prices. Data for Q2 show that the Polish economy remained on a fast growth path. However, these are historical data while prospects for the future remain uncertain.

Monetary Policy Council keeps interest rates on hold
As had been expected, the Monetary Policy Council kept interest rates unchanged at its recent meeting in late August. The reference rate is still 6.00%. As in the previous month, the Council’s communiqué said the Polish economy was still in a period of growth encompassing most of its sectors but it also pointed to the risk of a slowdown. The communiqué published after the meeting and comments made by Council members confirm our earlier expectations that the monetary authorities will want to analyse the economic situation more carefully. We are sticking to our prediction that interest rates will be raised once more this year – by 25 basis points in October. By that time, we will know a new inflation projection, GDP figure for Q3 and consumer inflation developments after CPI hit a high in August.

Growth in retail sales close to projected figure
Growth in retail sales stays at a high level: 14.3% y/y in July against 14.2% y/y in June. In real terms, the rate of growth in retail sales stabilised at the June level of 10.1% y/y. As in previous months, the rate of growth in food sales was low at 5.2% y/y. It is worth noting that motor vehicle sales recorded negative growth of -5.6% y/y, the worst result since June 2006. We believe this poor result was largely due to a rise in car imports supported by a strong zloty. Additionally, imports of used cars are still at a high level.

Ministry of Finance inflation estimates
The Ministry of Finance has estimated the August inflation rate at 5.0% y/y and 0.2% m/m. The figure is in line in our projection and higher than the July inflation rate of 4.8% y/y.

Zloty stabilises
In the first half of last week the zloty market was calm as international financial markets stabilised. An unsuccessful attempt to break through the strong psychological support level of 3.300 triggered a further sharp increase in the EUR/PLN rate in the later part of the week. But a slightly hawkish tone of the communiqué issued after the Monetary Policy Council meeting, indicating that further interest rate hikes were possible, helped the zloty to gain some ground. At the Thursday session, the EUR/PLN rate breached the strong resistance level at 3.34, which opened the way for further increases. As a result, the zloty weakened to 3.3620 but then bounced back in the later part of the session.

This analysis is complied by Millennium Bank