Is this the end of the monetary policy easing cycle?

Interest rates unchanged – contrary to expectations

Today, the Monetary Policy Council (MPC) decided to maintain the NBP reference rate at 5.75%, despite the market consensus and our forecast anticipating a 25bps cut.

Similarly to last month, the Council's press release following the meeting acknowledged the weakened global economic conditions and persisting uncertainty regarding the activity outlook in the largest economies. The MPC also noted that year-on-year producer prices in Poland had fallen. According to the Council, this confirms the fading of most external supply shocks and a reduction of cost pressures, which, together with the low economic activity growth, will support a further decline in consumer price inflation in the coming quarters. However, the passage concerning the decrease in inflation expectations, which the Council previously said led to increased monetary policy restrictiveness, was removed from the press release.

NBP forecasts higher inflation in 2025

In line with the NBP’s November projection, prepared under the assumption of unchanged NBP interest rates and taking into account data available until 23 October 2023, there is a 50% probability that the annual price growth will be in the range of 11.3-11.5% in 2023 (vs. 11.1-12.7% in the July 2023 projection), 3.2-6.2% in 2024 (3.7-6.8%) and 2.2-5.3% in 2025 (2.1-5.1%). Thus, the inflation path expected in the projection for 2023-2024 has been revised downwards (by around 0.5 pp) from the July forecast, while the projection for 2025 has been slightly increased. The projection also indicates that inflation will substantially exceed the MPC’s target of 2.5% throughout the forecast horizon. According to the projection, there is a 50% probability that GDP growth will be in the range of -0.1-0.6% in 2023 (vs. -0.2-1.3% in the July projection), 1.9-3.8% in 2024 (1.4-3.3%) and 2.4-4.7% in 2025 (2.1-4.4%). This paints a scenario of slightly lower economic growth in 2023 and a more pronounced recovery in subsequent years than the NBP previously anticipated.

The November projection includes a new note (absent in previous forecasts) indicating that "inflation developments, both in the short and in the medium term, are fraught with uncertainty related i.a. to future fiscal and regulatory policies”. It is worth noting that a key element of the November projection is the assumptions regarding protective measures for energy and changes in the VAT rate on food products in 2024. Detailed information on this will be available in the upcoming days, either during the conference on Thursday by the NBP Governor or at the presentation of the Inflation Report.

Is this the end of the monetary policy easing cycle?

Today's surprising announcement from the MPC reinforces our conclusions from a few months ago that changes have occurred in the central bank's reaction function, making monetary policy less transparent, less comprehensible, and consequently, less predictable. The decision also confirms our assessment that the easing measures implemented in September and October were primarily aimed at supporting the government's economic policy, despite elevated inflation and its distant return to the target.

The aforementioned uncertainty regarding future fiscal and regulatory policies and their impact on inflation, as well as the recent adjustments to NBP interest rates, were cited in today’s announcement as the main reasons for stabilizing the rates. The Council also emphasized that the current level of NBP interest rates is conducive to meeting the inflation target in the medium term. We believe that these factors will remain relevant over the coming months, limiting the Council's willingness to deliver further rate cuts. Thus, following the MPC's decision today, we see a significant upside risk for our scenario that assumes the reference rate will reach 5.50% in 2024. Tomorrow, A. Glapiński will hold a press conference which will probably shed more light on the monetary policy outlook.

The wording of the press release following today’s MPC meeting is slightly positive for the PLN exchange rate and yields on bonds.