Fiscal package does not increase the probability of rate hikes

Statement after the MPC meeting with no significant changes

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”. Like the month before, the Council emphasized that the outlook for economic conditions in Poland remained favourable, however, in the quarters to come, there would probably be a gradual slowdown in GDP growth. The Council repeated the view that "in the monetary policy transmission horizon inflation will remain close to the target”. In the Council's opinion, this view is supported by the results of the March GDP and inflation projection.

The March NBP projection: inflation lower and GDP growth higher than in the November projection

As we expected, the inflation path in 2019, forecast in the March projection, has - compared to the November projection - been revised significantly downwards, mainly due to lower expected dynamics of energy prices (the effect of factoring in the information on statutory freeze on energy prices in 2019). In accordance with the projection - prepared on the assumption of unchanged NBP interest rates - inflation will run with 50% probability between 1.2% - 2.2% in 2019 (vs. 2.6 – 3.9% in the November projection), 1.7% - 3.6% in 2020 (vs. 1.9 - 3.9%), and 1.3% - 3.5% in 2021. This means that, according to the projection, inflation will return to the MPC inflation target (2.5%) in 2020 and will stay close to target in 2021. As we expected, the March projection upheld the downward trajectory of GDP growth rate in subsequent quarters. The GDP growth rate forecast in the projection will run with 50% probability between 3.3% - 4.7% in 2019 (vs. 2.7 - 4.4%), 2.7% - 4.6% in 2020 (vs. 2.3 - 4.2%), and 2.4% - 4.3% in 2021. The projection has factored in the impact of the government-announced fiscal package (see MACROmap of 25/2/2019) which resulted in visibly higher GDP dynamics anticipated in 2019-2020.

NBP Governor: fiscal package does not increase the probability of rate hikes

At the conference after the MPC meeting, A. Glapiński repeated his view on the outlook for interest rates suggesting their possible stabilization in 2019 and 2020. In his opinion: "it is possible that perhaps no rate changes will be needed until the end of this Council's term, though of course it is too early to talk about it”. In his view, although the impact of the announced fiscal package on GDP dynamics will be "significant”, its implementation will not result in substantially higher inflation and thus higher likelihood of interest rate hikes this and next year. He believes that the fiscal stimulus will be implemented while keeping the budget deficit "under control” and it will not generate "any risks”.

NBP rates unchanged until March 2020

Today's remarks of A. Glapiński and the results of the March inflation projection support our scenario, in which NBP interest rates will remain unchanged until the end of 2019. We maintain our forecast, in which their first hike (by 25 bp) will take place in March 2020. However, we see a substantial downside risk to our forecast of NBP rates in 2020 due to the continuing slowdown of economic growth in the Eurozone which may incline the European Central Bank to extend the so-called forward guidance (the expected horizon of stable interest rates). In our view, the remarks of the NBP Governor are slightly negative for PLN and bond yields.