The return of the full VAT rate on food to 5% from the current 0% will raise inflation next year by 1ppt, translating into a CPI level of around 6% at the end of December 2024, Citi Handlowy estimates.
The NBP’s projection does not assume an extinguishment of the inflation shield in the food VAT part. We estimate that in the case of an increase in the VAT rate to 5%, inflation in 2024 would increase by an additional around 1 percentage point, so it would be around 6% at the end of the year. What we leave out of all this is that our estimate is made only on the basis of rate cuts in 2023, with FRA contracts pricing in a further 150bp cut in 2024, according to CitiWeekly – Economy and Financial Markets report.
The bank believes that the market’s valuation of a 125bp cut in Polish interest rates by the end of this year is excessive in the context of the possible path of inflation and the actions of the US Fed central bank.
According to the central path of the National Bank of Poland’s (NBP) July inflation projection, consumer inflation will fall to 7.8 per cent in the last quarter of 2023, reaching 4.6 per cent in Q4 2024 before slipping around the 3.3 per cent inflation target band in Q4 2025.
At the end of June, Prime Minister Mateusz Morawiecki announced that the zero VAT rate on food would be extended until the end of this year.
In May, Deputy Finance Minister Artur Soboń reported that there were indications that 0% VAT on food would be extended not only until the end of 2023, but “for longer”.
Source: Citi Handlowy and ISBnews
