MPC to accept negative real interest rates

The Council sees improvement in economic activity

As we expected, the Monetary Policy Council has left interest rates unchanged today (the reference rate amounts to 1.50%). The bias of the Council's statement has not substantially changed compared to the December statement. 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 probably subdued, however, in its view, "monthly data signal some improvement in economic activity over the recent past”. The Council expressed the opinion that the fall in investment in Q4 was – like in Q3 – "caused to a large extent by temporarily lower use of EU funds after the completion of the previous EU financial perspective”. In addition, the Council emphasized that the increase in inflation had resulted mainly from factors beyond the direct impact of domestic monetary policy. This signals that the expected by us sharp increase in inflation in the coming months (see MACROmap of 12/12/2016) will not be an argument for the Council to tighten the monetary policy.

No reasons to change interest rates in 2017

During the press conference, Adam Glapiński expressed the view that the current parliamentary crisis in Poland would not have a substantial impact on the economic situation. In his view "the influence of politicians on investments is non-existent". He has maintained his view that investments may be expected to considerably increase in 2017 due to higher absorption of EU funds. He expects that in 2017 inflation will "touch” the lower limit (1.5%) of permissible deviations from the MPC inflation target (2.5%), however this target will not be reached. In his opinion, despite the anticipated significant increase in inflation, there are no reasons for changing interest rates in 2017. This means that the MPC is going to accept zero or slightly negative real interest rates for a longer period.

Tapering in the Eurozone will open the door to rate hikes in Poland

Today's remarks of A. Glapiński support our medium-term forecast of NBP rates (see MACROmap of 12/12/2016). We maintain our scenario, in which, due to inflation running close to the target and the expected by us solid economic growth, the Council will start the monetary tightening cycle in June 2018 and will increase interest rates in total by 50bp in 2018. This scenario is consistent with our expectations concerning the shape of the ECB monetary policy. We forecast that starting from April 2018, the asset purchase program implemented by the ECB will be gradually tapered, enabling its termination in December 2018. Consequently, the monetary tightening in Poland in June 2018 will not contribute to a rapid appreciation of PLN.

In our view, the press release after the MPC meeting and the remarks of the NBP Governor are neutral for PLN and the debt market.