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NBP projection supports the stabilization of interest rates in Poland

MPC statement without substantial 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”. The Council also noted that the economic outlook remained favourable, and GDP growth, despite the expected decline, would continue at a relatively high level in the coming years. The Council stated that: “at the same time, there remains uncertainty about the scale and persistence of the slowdown abroad and its impact on domestic economic activity”. Like the month before, the Council expects that "inflation - after a temporary rise in 2020 Q1- will stay close to the target in the monetary policy transmission horizon” (2.5% +/- 1 pp). During the conference the MPC members added that the expected local maximum for inflation at the beginning of the next year would amount to 3.5%.

The November NBP projection: inflation revised slightly upwards, GDP growth downwards

The inflation path in the 2019-2021 period, forecast in the November projection, has - compared to the July projection - been revised slightly upwards The projection forecasts that electricity prices will rise by ca. 8% in 2020 (the effect of the assumed “unfreezing” of energy prices). In accordance with the projection - prepared on the assumption of unchanged NBP interest rates - inflation will run with 50% probability between 2.2%-2.4% in 2019 (vs. 1.7%-2.3% in the July projection), 2.1%-3.6% in 2020 (vs. 1.9%-3.7%), and 1.6%-3.6% in 2021 (vs. 1.3%-3.5%). This means that, according to the projection, inflation in the 2019-2021 will run close to the MPC inflation target. The November projection maintained the downward trajectory of GDP growth rate in subsequent years and revised it downwards compared to the path presented in July. The GDP growth rate forecast in the projection will run with 50% probability between 3.9%-4.7% in 2019 (vs. 3.9%-5.1% in the July projection), 2.7%- 4.4% in 2020 (3.0%-4.8%), and 2.3%-4.2% in 2021 (vs. 2.4%-4.3%).

The macroeconomic projection supports the stabilization of interest rates in Poland

During the conference the NBP Governor, A. Glapiński, indicated that the latest projection supported the policy of keeping interest rates at the current level. In his opinion, interest rates are likely to remain stable until the end of the Monetary Policy Council term (the beginning of 2022). Present at the conference MPC members R. Sura and Ł. Hardt also pointed to a high likelihood of interest rates remaining unchanged in the coming quarters.

In their opinion, an additional argument supporting the wait-and-see policy is increased uncertainty in Poland’s external environment and a possibility that the forecast in the projection increase in electricity prices will not materialize at the scale assumed in the November projection. In accordance with the MPC members’ remarks, if the prices of electricity do not rise next year, the CPI inflation path would run at a level lower by ca. 0.3pp. A. Glapiński has confirmed his earlier view that the likely direction of subsequent interest rates change would rather be their decrease than increase but he currently cannot see any arguments in favour of such changes.

Interest rates unchanged at least until the end of 2020

Today's remarks of MPC members and the results of the latest projection support our scenario, in which NBP interest rates will remain unchanged at least until the end of 2020. The expected by us accommodative monetary policy of the ECB (another deposit rate cut, continuation of the quantitative easing program) is consistent with this forecast. In our view, the text of the statement after the MPC meeting and the remarks of the NBP Governor at today's conference are neutral for PLN and bond yields.