The MPC will not react to the temporary overshooting of the inflation target

MPC statement: inflation may exceed the target

As we expected, the Monetary Policy Council has left interest rates unchanged today (the reference rate amounts to 1.50%). The statement after the meeting has changed considerably to address the issue of inflation standing at an elevated level. The Council indicated for the first time that inflation might exceed the upper limit of band for deviations from the target (3.5% YoY) in the coming months. The statement points out however that “the temporary rise in price growth will be driven by supply-side and regulatory factors, i.e. ones remaining beyond the direct impact of domestic monetary policy. As the impact of these factors fades and GDP growth weakens, inflation will gradually decrease”. 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 added that the current level of interest rates was “at the same time enabling to meet the inflation target in the medium term”. Thus, despite the expected and temporary overshooting of the target, the Council assessment of the outlook for inflation has not changed substantially compared to the one expressed in recent months.

The MPC will not react to the temporary overshooting of the target

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 in this time horizon rates are more likely to be cut than hiked. At the same time he stressed the supply-side nature of the expected increase in inflation in H1 2020 (i.a. higher prices abroad and the rise of electricity prices) and emphasized that inflation would probably decrease in H2 2020. Such assessment of the prospects for price growth is consistent with our inflation scenario – we will present it in the next MACROmap.

In the context of the economic outlook, the NBP Governor pointed out that lower GDP growth rate in Poland was partly due to the slowdown abroad but that the fundamental situation remained good. He believes that the coronavirus epidemic in China will have a limited impact on the economic growth in Poland. In his view, GDP dynamics will stand at ca. 3.0-3.5% in 2020.

The MPC members present at the conference – E. Łon and K. Zubelewicz – expressed opposing views concerning the appropriate level of interest rates. The former sees room for rate cuts (to stimulate economic growth) while the latter believes that the current level of rates was too low and their increase would be conducive to stabilizing inflation.

Interest rates unchanged at least until the end of 2021

Today's remarks of Council members support our scenario, in which NBP interest rates will remain unchanged at least until the end of 2021 despite a temporary overshooting of the NBP inflation target in Q1 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 statement after the MPC meeting and the remarks of the NBP Governor at today’s conference are neutral for PLN and bond yields.