Inflation target and rate hikes are still distant

Rates unchanged, dovish tone of press release

As we expected, the Monetary Policy Council has left interest rates unchanged today (the reference rate amounts to 1.50%). The MPC maintained the view that "given the available data and forecasts, the current level of interest rates is conducive to keeping the Polish economy on the sustainable growth path and maintaining macroeconomic balance”. In the Council's opinion, the GDP growth in Q4 2016 was at a level close to the one observed in Q3 while the drop of investment in Q4 had probably been limited by an increased use of EU funds. In addition, in the Council's opinion, "bearing in mind the external and most probably temporary nature of factors behind the increase in price growth as well as low domestic demand pressure, the risk of inflation persistently running above the target in the medium term is low”. Such change in the press release after the Council's meeting, contributing towards weakening the expectations of interest rate hikes, is in line with our forecasts (see MACROmap of 6/2/2017). This sentence can also be interpreted as a low – in the Council's opinion – probability of secondary inflationary effects caused by higher commodity prices (so-called second-round effects).

Awaiting "dynamic acceleration of growth”

During the press conference, Adam Glapiński expressed the view that most likely in Q2 2017 and "in the worst case scenario” in the middle of 2017 we would see a "dynamic acceleration of growth” and in the whole 2017 GDP dynamics would run at 3.5 – 3.6%. He maintained his view that the said acceleration of growth would be related to higher absorption of EU funds. In his view, the coming quarters will see a gradual weakening of the inflation impulse due to the expected stabilization of oil prices. In his opinion, the MPC members agree that "wait-and-see” approach is now the best way of conducting monetary policy and he himself will be in favour of leaving NBP rates unchanged at the coming meetings. This means that the MPC is going to accept zero or slightly negative real interest rates for a longer period of time.

Lower real rates mean monetary easing

Today's remarks of A. Glapiński support our medium-term forecast of NBP rates (see MACROmap of 12/12/2016). We forecast that, due to inflation running close to the target and the expected by us moderately solid economic growth, the Council will decide to start the monetary tightening cycle in June 2018 (interest rates hikes in 2018 will amount in total to 50bp). This means that amid the expected by us sharp increase in inflation in 2017, the NBP reference rate will significantly decrease in real terms to a level close to zero. Consequently, the monetary policy will be eased and this easing will be justified by a distant prospect of inflation returning to the MPC target (2.5%). Our scenario of the monetary policy in Poland is consistent with the expected by us trend towards a gradual strengthening of PLN to a level of 4.18 vs EUR as at the end of 2017 and the accompanying intensification of the market expectations of NBP rate hikes.

In our view, the press release after the MPC meeting and the remarks of the NBP Governor are negative for PLN and yields on bonds.