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MPC holds neutral stance despite the December’s inflation shock

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”. Like in December 2019, the Council 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 statement also repeats the assessment of the economic outlook for Poland: “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).

MPC holds neutral stance despite the December’s inflation shock

At the conference after the MPC meeting, the NBP Governor, A. Glapiński, repeated the view he had voiced earlier that interest rates would remain unchanged until the end of his term of office. He still believes that the first change in interest rates would be their reduction. Furthermore, he expressed an opinion that there is a low probability of scenario in which the CPI inflation would exceed 4% in Q1 and remain elevated for a longer time. In his view, despite the surprisingly high flash inflation estimate in December (3.4%), inflation in Q1 would be only slightly above the inflation path from the November inflation projection. According to the NBP governor, the scenario in which after reaching the local maximum inflation would drop and in the monetary policy horizon would reach MPC inflation target (2.5%). He presented an opinion that the monetary policy tightening at the beginning of 2020 would result in lowering inflation below the inflation target in 2021.

The MPC members present at the conference - Jerzy Żyżyński and Cezary Kochalski – emphasized that the December’s increase in inflation and the expected further increase in inflation are of supply-side nature. They pointed to rising food, fuel, electricity and garbage collection prices as major inflationary sources which are beyond the reach of the central bank policy. According to them, which is also consistent with the opinion of A. Glapiński, the probability of the second round effects (increase in wage and inflation pressure due to elevated inflation expectations) is low. A. Glapiński also emphasized that in his opinion there is no reason for exaggerated inflation expectations.

Interest rates unchanged at least until the end of 2020

Today's remarks of MPC members support our scenario, in which NBP interest rates will remain unchanged at least until the end of 2020 despite the expected increase in inflation in Q1. The expected by us accommodative monetary policy of the ECB (another deposit rate cut, continuation of the quantitative easing program), and a significant slowdown in investment growth in the coming quarters, are consistent with this forecast.

In our view, the statement after the MPC meeting and the remarks of the NBP Governor at today's conference are negative for PLN and bond yields.