July CPI turned out to be higher than expected:
* 0.1%m/m vs -0.1% expected and 0.2% in June
* 3.6%y/y vs 3.4% expected and 3.5% in June
Transport cost and in particular the cost of fuel was the main driver behind July CPI. Fuel prices increased by 4.1%m/m. This was only partly offset by the 1.2%m/m decline in food prices. Most other sub-categories of the CPI basket posted month-on-month price increases, which suggests persistent underlying inflation pressure in spite of stagnant growth.
Headline inflation remained above the target range of 1.5-3.5% and well above the declared main target of 2.5%. Therefore, July CPI weakens the case for an interest rate cut in the near future. Indeed, we expect the MPC to keep the policy rate at 3.5% in the remainder of this year.
In the light of this, July CPI is on balance PLN supportive but adverse news for the equity market. That said, the MPC was expected to keep rates on hold in August at any rate, and hence the financial market reaction should be relatively mild.