”Excellent economic situation” according to NBP July projection

MPC statement unchanged

As we expected, the Monetary Policy Council has left interest rates unchanged today (the reference rate amounts to 1.50%). In the statement after the meeting, the Council repeated the view that "the current level of interest rates is conducive to keeping the Polish economy on a sustainable growth path and maintaining macroeconomic stability”. The MPC also said that "current information and the results of the projection point to a favourable outlook for economic activity growth in Poland, despite the expected slowdown in GDP growth in the coming years” and "in line with the results of the projection, inflation will remain close to the target in the monetary policy transmission horizon.”

NBP projection: lower inflation and faster economic growth in 2018

The inflation path in 2018, forecast in the July projection, has - compared to the March projection - been visibly revised downwards. In accordance with the projection - prepared on the assumption of unchanged NBP interest rates - inflation will run with 50% probability between 1.5% - 2.1% in 2018 (vs. 1.6% - 2.5% in the March projection), 1.9% - 3.5% in 2019 (vs. 1.7 – 3.6%), and 1.7% - 3.9% in 2020 (vs. 1.9%-4.1%). This means that, according to the projection, inflation will attain the MPC inflation target (2.5%) in 2019. In 2020 this target will be slightly exceeded, however inflation will run within the tolerance band (1.5% - 3.5%). As we expected, the GDP growth rate in 2018, forecast in the July projection, has been revised upwards. In accordance with the projection, GDP growth rate will run with 50% probability between 4.0% - 5.2% in 2018 (vs. 3.5 – 5.0% in the March projection), 2.8% - 4.7% in 2019 (vs. 2.8% - 4.8%), and 2.4% - 4.3% in 2020 (vs. 2.6%-4.6%). This means that the NBP projection continues to paint a scenario of inflation gradually increasing above the inflation target in 2020 amid slight slowdown of economic growth, although the anticipated path of economic growth in 2018 is visibly higher than in the March projection.

NBP Governor: interest rates unchanged until the end of 2020, ECB decisions important for MPC

According to the NBP Governor A. Glapiński, the results of the July inflation show "an excellent economic situation until the end of 2020” and increase the likelihood of stable interest rates in 2019. As he said, the projection results strengthen his belief that there would be no changes of interest rates until the end of 2020. He pointed out that any possible rate hikes in the Eurozone in 2019 would be a meaningful signal taken into account when making interest rate decisions. Present at the conference MPC Member J. Żyżyński has shared the view that stabilization of rates is needed for an extended period of time. In turn, another Council Member, Ł. Hardt, so far showing a relatively high aversion to inflation, has not excluded the need to hike rates in 2019, should the impact of the so-far anti-inflation factors (i.a. globalization, stable profitability of enterprises despite faster wage growth) decrease and should the growing protectionism increase inflationary pressure. In the opinion of Ł. Hardt, the only possible change of interest rates is their increase and any rate cuts would be negative for the banking sector stability. This view is consistent with the earlier-expressed opinion of the NBP Governor that NBP rates have reached the bottom limit and monetary easing, if any, will be implemented using non-conventional tools.

Interest rates hike no sooner than in March 2020

Today's remarks of A. Glapiński and MPC members are in line with our scenario, in which NBP interest rates will remain unchanged until the end of 2019 (first hike by 25 bp in March 2020). Current market expectations point to first interest rate hike at the turn of Q3 and Q4 2019. The remarks of the NBP Governor and MPC members are thus slightly negative for PLN and bond yields.