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NBP interest rates stable until the end of the MPC term?

MPC: inflation will be lower than anticipated in the November inflation projection

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 "current information points to a relatively favourable outlook for economic conditions in Poland, although a gradual slowing in GDP growth is expected in the years ahead”. In the Council's assessment, "according to current forecasts, the annual price growth will increase in the coming months, yet – due to the decline in oil prices and the freeze on electricity prices – the scale of this increase will be smaller than anticipated in the November projection”. The Council repeated the view that "in the monetary policy transmission horizon inflation will remain close to the target”.

NBP Governor: interest rates may remain stable until the end of the MPC term of office

At the conference after the MPC meeting, A. Glapiński said that the November inflation projection had assumed "possibly highest,safe” growth of electricity prices in 2019. In his view, taking into consideration the impact of the act on freeze of electricity prices, adopted in December 2018, and the sharp decline in oil prices, inflation in the projection horizon can be expected to be significantly lower than anticipated in the November inflation projection. According to the NBP Governor, inflation will run below the Monetary Policy Council target (2.5%) over the entire projection period.

The NBP Governor repeated the view on interest rate outlook that NBP rates will be left unchanged between 2019 and 2020. However, he added, and that is a significant change compared to his earlier remarks, that NBP rates might remain stable until the end of the MPC term of office, falling at the beginning of 2022. In the opinion of the NBP Governor "stable interest rates serve best the economy” and at the same time are high enough to be decreased in the event of slower economic growth. He suggested again that if monetary easing became necessary, the Council would consider such easing by using unconventional monetary tools instead of cutting interest rates. In his view, the absence of excessive lending is an important argument in favour of not increasing interest rates. Present at the conference MPC members J. Żyżyński and J. Kropiwnicki shared this view.

The NBP Governor informed that the Council was currently not debating any interest rate cuts. Noteworthy in this context is the opinion expressed by J. Żyżyński, who said that discussion on monetary policy easing, if any, will start "no sooner than in 6 months' time”.

NBP rates unchanged until March 2010

Today's remarks of A. Glapiński point to a distant perspective of monetary policy tightening. They are consistent with our scenario, in which NBP interest rates will remain unchanged until the end of 2019 and the first hike (by 25 bp) will take place in March 2020. Our interest rate forecast is strongly supported by a significant downside risk to the November NBP projection, in which the growth of prices of consumer goods and services will stand at 3.2% in 2019. The main risks to this projection are the fall of oil prices in Q4 2018 to a level significantly below the one assumed in the projection, the likely way lower than projected growth of electricity prices for households, enterprises and local government units in 2019, as well as the business-survey-suggested decreasing wage pressure, which in the coming months will be limited by the expected slowdown of economic growth and the launch of the Employee Equity Scheme (see MACROpulse of 18/12/2018). We maintain our view that inflation will amount to 1.5% in 2019 vs. 1.6% in 2018 (see MACROmap of 7/1/2019).

Current market expectations point to first interest rate hike in 2021.

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