Interest rates unchanged until the end of 2020?

MPC: outlook for economic growth remains favourable

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 Council also emphasized that the released today results of the March projection of inflation "indicate a favourable outlook for growth in economic activity in Poland, despite an expected slight slowdown in GDP growth in the coming years” and "in line with the projection, in the monetary policy transmission horizon inflation will remain close to the inflation target”.

NBP projection: inflation to increase above the MPC target amid gradual slowdown of economic growth

The inflation path in 2018 and 2019, forecast in the March projection, has - compared to the November projection - been slightly revised downwards. In accordance with the projection - prepared on the assumption of unchanged NBP interest rates - inflation will run with 50% probability between 1.6% - 2.5% in 2018 (vs. 1.6% - 2.9% in the November projection), 1.7% - 3.6% in 2019 (vs. 1.7 – 3.7%), and 1.9% - 4.1% in 2020. This means that, according to the projection, inflation will attain the MPC inflation target (2.5%) in H2 2019. In 2020 this target will be visibly exceeded, however inflation is likely to run within the tolerance band (1.5% - 3.5%). In turn, GDP growth rate will run with 50% probability between 3.5% - 5.0% in 2018 (vs. 2.8 - 4.5% in the November projection), 2.8% - 4.8% in 2019 (vs. 2.3% - 4.3%), and 2.6% - 4.6% in 2020. This means that the NBP projection continues to paint a scenario of inflation gradually increasing amid slight slowdown of economic growth, although the anticipated path of economic growth is visibly higher than in the November projection.

Interest rates unchanged until the end of 2020?

At the conference after the meeting, the NBP Governor, A. Glapiński repeated the view presented in recent months that NBP interest rates should stay at the current level until the end of 2018 (a hike in 2018 is "unlikely”). In his view, the core inflation anticipated in the projection is increasing "very slowly” and the projection points to lack of inflationary pressure in the Polish economy. However, the NBP Governor presented a surprising opinion that – if the scenario outlined in the March projection materializes – the NBP interest rates should remain at the current level until the end of 2020. He also allowed that motions for rate cuts would appear towards the end of 2020. In our view, these remarks, combined with the results of the inflation projection presented above (MPC target visibly exceeded in 2020), suggest that the NBP Governor and probably most MPC members see the inflation target as a band inflation target (1.5% - 3.5%) and not as a point inflation target with a tolerance band (2.5% +/- 1 pp). The remarks of other MPC members present at the conference (G. Ancyparowicz and J. Żyżyński) indicated that their bias in monetary policy was close to that of the NBP Governor.

Downside risk to our forecast of interest rates

Today's remarks of the NBP Governor signal a downside risk to our forecast of NBP interest rates (first hike by 25 bp in July 2019). However we believe that the above-presented hypothesis concerning the way most MPC members see the inflation target needs to be verified in a period when, in the monetary policy horizon (5-7 quarters ahead, when the impact interest rate changes on inflation is the strongest), the price dynamics anticipated in the NBP projection will visibly exceed 2.5%. In our view, the appropriate time for such verification will be H2 2018. Consequently, we maintain our scenario of monetary policy tightening in H2 2019.

In our view, today's remarks of the NBP Governor are negative for PLN and government bond yields.