MPC divided on negative real interest rates

MPC statement with no significant changes

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". Like in June, the Council indicated in its statement that due to "fading effects of the past increase in global commodity prices, with only a gradual rise in domestic inflationary pressure stemming from improving domestic economic conditions (…) the risk of inflation persistently running above the target in the medium term is limited".

NBP projection: inflation down, GDP up

As we expected, the inflation path in 2017, forecasted in the July projection, has - compared to the March projection - been revised downwards and the GDP growth rate in 2017 has been raised. In accordance with the July projection - prepared on the assumption of unchanged NBP interest rates - inflation will run with 50% probability between 1.6% - 2.3% in 2017 (vs. 1.6 - 2.5% in the March projection), 1.1 - 2.9% in 2018 (vs. 0.9 - 2.9%), and 1.3 - 3.6% in 2019 (vs. 1.2 - 3.5%). This means that, according to the projection, inflation will continue to run below the MPC inflation target (2.5%) in 2017 and 2018, namely in the policy-relevant horizon, and will attain this target no sooner than in 2019. The forecasted in the projection GDP growth rate in 2017 and 2018 has been raised. In accordance with the July projection, GDP growth rate will run with 50% probability between 3.4 and 4.7% in 2017 (vs. 3.4 - 4.0% in the March projection), 2.5 - 4.5% in 2018 (vs. 2.4 - 4.5%), and 2.3 - 4.3% in 2019 (2.3 - 4.4%). In the Council's opinion, the results of the July projection support the view that the risk of inflation running persistently above the target in the medium term is limited.

NBP Governor: steady influx of Ukrainians will continue

At the conference after the meeting, the NBP Governor, A. Glapiński, repeated the view presented earlier that interest rates were "highly likely" to remain unchanged until the end of 2018. Referring to the results of the NBP surveys, he stated that despite the visa waiver for Ukrainians travelling to the EU countries, the steady influx of immigrants from Ukraine to Poland would continue. Consequently, the wage pressure would remain limited. In his opinion, "lively discussions" will start in the middle of 2018 in the MPC concerning the need to tighten the monetary policy, due to the prospect of inflation returning to the MPC target (2.5%) within the monetary policy relevant horizon. The NBP Governor stressed again that "for the time being” he saw no danger in MPC maintaining negative real interest rates. However, present at the conference Council member E. Gatnar indicated that negative real interest rates were a reason for concern as a factor reducing propensity to save. In our view, the problem of the impact of negative real interest rates on the economy, referred to in recent months by the MPC members (see MACROpulse of 7.06.2017), is the main axis of controversy within the MPC. We expect that in H2 2017, together with a temporary decrease in inflation, the role of this argument in favour of monetary tightening will diminish.

Rate hike is still distant

The above-quoted remarks of Council members indicate that MPC bias in monetary policy has not substantially changed compared to the one presented after the June meeting. At the same time, they support our forecast of NBP rates, in which, with inflation staying significantly below target, the MPC will leave interest rates unchanged until November 2018. Our scenario is strongly supported by the last week's reading of flash June inflation data (1.5% YoY vs. 1.9% in May). They signal a significant downside risk to our forecast of inflation in H2 2017 and – due to lower base effect – an upside risk to the forecasted by us price dynamics in H2 2018 (see MACROmap of 12/6/2017).

In our view, the statement after the MPC meeting and remarks of the NBP Governor are neutral for PLN and bond yields.